Private nonprofit institutions account for a sizable and growing share of our nation's economic activity.' The sectors in which these institutions are most common-education, research, health care, the media, and the arts-are vital elements in the modern economy. More-@ Copyright 1980 by Henry B. Hansmann.

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I. INTRODUCTION THE leading private universities in the United States commonly maintain large financial reserves conventionally referred to as endowments. Harvard and Yale, for example, had endowments in 1988 of $4.2 billion and $2.1 billion, respectively.' Although these two institutions are among the best endowed in the nation, there are hundreds of others that also have substantial endowments. (Table 1 gives a sample of their size and distribution.) These endowments are now so familiar that their purpose is seldom questioned. Yet, if we consider the matter closely, it is not obvious why they are accumulated. The distinctive character of endowed institutions emerges strongly when we contrast their financial behavior with that of large business corporations. The typical business enterprise finances a substantial fraction of its capital needs through borrowing. Debt currently represents roughly one-quarter of the net worth of all companies listed on the New

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