Why do professors use course-buyouts? I am confused about how course buyouts work in the United States and about how the incentives play out for professors and the university. I will use a constructed example to frame my confusion. Please let me know if my example is unrealistic. 


  Say that a university pays an assistant professor $100,000 for his teaching during the academic year. He has received an external grant of $500,000 of which $150,000 goes to the university as overhead. The professor wants to lessen his teaching load, and he can do so by paying the university a part of his salary, also known as "buying-out". His university charges 20% of his full-year salary for each course he buys out. So he has to pay the university $20,000 to avoid teaching that one course. The university then hires a non-tenure track faculty or a graduate student to teach this course for $10,000. 


Just to review: The university has received $150,000 from overhead, paid $100,000 as a salary, received $20,000 for a course buyout, and then paid $10,000 for someone else to teach the course. So the university has received $60,000 from this transaction. Doesn't this transaction greatly benefit the university. Ostensibly it also benefits the professor who gets to do research in the time saved from teaching, but if this research has the potential to bring in more grant dollars and hence more overhead to the university, isn't the ultimate benefit still to the university? 

Is this how the process sometimes works? If so, do universities encourage professors to use course-buyouts as a way to do more research, in a way similar to how researchers are encouraged to apply to grants? 



tl;dr: Course-buyouts can give junior professors more time to do research which is necessary for their professional advancement, but it seems that at the end of the course-buyout process, it is mostly administrators and the university that is advantaged, almost as if the researcher is giving the university money so that he or she can do the research which will bring yet again more money into the university.
Actually, it is both better and worse than you describe. The substitute faculty member is unlikely to get $10K to teach the course. Probably closer to $2k. 

Even if the professor doesn't teach as much and spends more time on research, he/she is also expected to advise and guide graduate students in their own research. This also benefits the university, of course. 

But the overhead reimbursement is to reimburse real costs. When the professor/university get the grant it is up to the university to verify that the funds are properly used. This means that people are paid a salary to manage the grant and report to the funding agency periodically. It isn't just a "gift" as it entails real responsibilities (and potential liability). 

But if you are thinking of the university as a profit center you are mistaken. The university benefits both from good teaching and from good research (and advising). But most universities are not-for-profit and whatever revenue comes in from whatever source goes back into the system, not to owners/shareholders. Some money is put aside for future needs and uncertainties. 

If there is abuse in the system it is that there are probably too many administrators, but that is a different issue.