Doing Economics

5.1 Internal versus External Funding and Indirect
Costs
A useful dichotomy when it comes to funding is internal versus external
funding. “Internal funding” refers to grants and other sources of funding
within your institution, whether at the level of the department, school,
college, or university. The higher internal funds are within your institution’s
hierarchy, the harder they are to get, both because you will face more
competition for every dollar of funding and because your proposal will be
read by people who are further removed from your area of research.
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“External funding” refers to grants and other forms of funding outside of
your institution. Any funding from local, state, and federal governments or
their agencies (e.g., NIH, NSF), from foundations (e.g., Ford Foundation,
Pew Charitable Trust, Rockefeller Foundation), or from international
organizations (e.g., the Consultative Group on International Agricultural
Research) is external funding.
Beyond defining those terms, why is it useful to know the difference
between the two? Because typically in a job where grants are seen as
outputs more than inputs (i.e., in a job where grantsmanship is an explicit
tenure and promotion criterion, and where there are clear incentives to get
funding), a dollar of external money is worth more to your career than a
dollar of internal money given that it is both more difficult to compete for
external funds (and submitting grant proposals and being successful at
getting funds is a form of peer review) and literally worth more to your
institution because typically, for every external grant dollar you bring in,
your institution will have you pay up to an additional 60 percent. This

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means that if you need $100,000 for a given research project, you will have
to request $160,000 from the funder to cover these so-called indirect costs.
For most economists, this system of indirect cost recovery (ICR) can be
rather frustrating. This is because the stated reason for universities to
recover indirect costs—the university has to be able to host your research
project and provide the relevant physical and administrative infrastructures
—is less likely to apply to economists than to some other disciplines.
Unlike natural scientists, who often need expensive laboratories occupying
valuable space in university real estate, most economists can do their
research on a laptop with a reliable Internet connection. Moreover, when
they do change, ICRs almost always go up. As I write these lines, the ICR
at my own institution is 54 percent, but it will go up to 55 percent next
academic year.
There are various ways to reduce the amount paid in ICR. First and
foremost, if you are applying for funding with a team of coauthors, it is
worth asking them what the ICR rate is at their institution, and go with the
one that has the lowest rate.
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Second, if you can argue that a significant
portion of the work done as part of the grant will be done off campus, you
can request to pay the off-campus rather than the on-campus ICR. I already
mentioned that my institution’s (on-campus) ICR is 54 percent. But if I
were to get a grant to run an RCT in another country, for example, I could
lower my ICR to the off-campus rate of 26 percent if I could argue that
more than half of the work done as part of that grant would be done off
campus.