Vernon Smith former UA economics professor

Nobel winner, colleagues say a hostile environment prompted them to leave

Editor's note: This is the first article in a two-part series on the UA "Brain Drain" problem.

When it comes to the loss of talented intellectuals to other universities, also known as "brain drain," former UA economics professor and recent Nobel Prize recipient Vernon Smith might be the poster child for the UA.

Smith, who won the Nobel Prize in economics a year after leaving the UA for George Mason University, said his decision to leave had nothing to do with money.

Smith said he and six of his colleagues left the UA in 2001 when a faculty member suggested some of the Economic Science Laboratory staff were mishandling research funds, which led to a hostile working environment. Smith said this threatening and mistrustful environment eventually forced him and his staff to hire lawyers.

When Smith left the UA, he was the research director of the ESL, which was being partially funded by Cybernomics Inc. and its predecessor, the Arizona Technology Development Corporation.

Cybernomics and the ATDC, run by Smith and several UA colleagues at the ESL, were private fund-raising initiatives that sought out revenue for the ESL through research grants and consulting projects in the private sector. Their mandate was to raise $2 or $3 for every $1 of state funding for the lab.

Smith also set up the International Foundation for Research in Experimental Economics in 1997 to fill the void left when the state budget was no longer able to provide funding for faculty workshops and outreach programs for the ESL.

According to Smith, it was years of a hostile working environment, starting with an independent audit of the ESL, that led Smith and six of his colleagues to leave the UA for George Mason University in Virginia. The audit began when a faculty member of the economics department complained about being excluded from ESL projects to the provost.

Smith said the audit could have been avoided if the administration would have been more flexible and willing to explore new administrative avenues.

Provost George Davis said the claim led to an audit, which charged that the UA lost revenue when consulting contracts with private companies went through Cybernomics and IFREE rather than through the UA's Office of Sponsored Projects. The UA also claimed it was damaged by the ESL faculty receiving consulting fees on these contracts while on university salary.

Smith said the audit claims of mishandling research funds had no merit and that the sole purpose of the groups was to bring revenue to the ESL.

Cybernomics and the ATDC were set up to circumvent state laws that did not allow the UA to benefit from projects in the private sector. Both were set up with cooperation of the UA and had the approval of the Arizona Board of Regents.

Due to state laws limiting the amount of money generated by grants going through the UA Office of Sponsored Projects, Smith said the funds generated by ESL faculty consulting generated more for the UA than if the contracts were run through the Office of Sponsored Projects.

Smith used a large Federal Communication Commission contract awarded to Cybernomics as an example.

Smith said Cybernomics gave the UA $446,000, or 41 percent of the total amount received from the contract, valued at $1,075,410. The maximum the UA could have gained if it had directly received the contract as a sponsored project would have been approximately $356,639, or 34 percent.

Smith said the ESL raised more than $8 million in research and development grants during the period of 1985 to 2001.

Stan Reynolds, the economics department head from 1998 to 2001, said private consulting by ESL faculty was not the concern of the audit.

"People do consulting; it is not that uncommon at all," Reynolds said.

Reynolds said the concern of the audit was whether the consulting activity fully compensated the UA for the resources ESL faculty used.

"It had to do with resources - the lab time and personnel." Reynolds said.

Steve Rassenti, who was the Associate Director Economic Science Laboratory from 1992 until 2001, said the complaint by a faculty member that the ESL faculty members were mishandling research funds was baseless.

Rassenti, who joined his colleagues at George Mason University in 2002, called the audit a " protracted witch-hunt."

"The audit got it wrong, and nobody wanted to listen to our story and become responsible for solving the problem," Rassenti said.

Davis denies Rassenti's charge, saying the resulting audit was the standard response when a faculty member makes a complaint to his office.

"There was a sense that (the FCC contract) was getting in the way (of teaching and academic research)," Davis said.

Davis said some felt those working on the FCC consulting contract were spending too much time on it.

Davis said the rules on faculty consulting are complex, and an audit was the only way to look into charges of "double-dipping" and whether or not ESL staff appropriately handled the grants.

"Faculty members may consult one day a week," Davis said. "But it is really hard to pin that down. Some (private) consulting fits nearly seamlessly with scholarship."

Smith said his biggest complaint was that the audit was conducted in what he thought was a threatening and mistrustful manner, forcing him and his staff to get lawyers rather than sit down with those who voiced concern about funding and ESL projects.

Smith and several ESL members eventually agreed to go to mediation with the UA to settle the audit claims.

Rassenti said legal maneuvers were the sole reason for mediation between the ESL staff and the UA administration.

"(The administration) could have taken the bull by the horns, sat down with us and the perpetrator of the accusations and solved the problem," Rassenti said.

Late this summer, Smith, Rassenti and three ESL colleagues settled with the UA, each paying $18,750 to settle the case. There was no admission of wrongdoing in the settlement.

Smith said the amount he and his team paid the UA in terms of the settlement was inconsequential in comparison to the amount they raised through contracts.

Smith said of the settlement, "It was a pittance."

Both Smith and Rassenti say they think the treatment they and other ESL members received was indicative of a larger issue.

Smith said it was the current administration's lack of flexibility and its unwillingness to explore new administrative avenues that continue to drive out talented faculty rather than just purely financial considerations.

"With dwindling state revenues, we need to pursue more private funding" Smith said.

Several members of the UA administration and Eller College of Management declined to comment, citing legal reasons.