It has become well documented that the performance gap between European and US universities is at least partly due to lower spending on higher education in Europe. Rather
than raising the public budget or promoting private contributions, many governments have attempted to make public spending more efficient in various ways. This article reports the results from a proposed funding system reform in Flanders (Belgium), which aimed to save
costs by reducing the diversity and duplication of study programs. We draw the following lessons. While reducing program diversity may save on fixed costs, this is typically
insufficient to compensate for consumer surplus losses due to low student mobility.
Furthermore, decentralized financial incentives mechanisms may be ineffective since they may often promote program cuts when this is undesirable, and vice versa. These findings illustrate the difficulties with regulatory reforms that mainly aim to reduce costs. Hence, the
question how to raise total spending on higher education (whether through public or private means) cannot be avoided. (JEL codes: I20; I23; C25