Journal of Public Economics vol:94 issue:5-6 pages:397-409
Public systems of higher education have recently attempted to cut costs by providing financial incentives to cut duplicated programs, i.e. programs that are offered at different institutions. We study the profit and welfare effects of reducing program duplication, against the background of a funding system reform in Flanders (Belgium). We find that dropping duplicated programs at individual institutions tends to be socially undesirable, due to the students’ low willingness to travel to other institutions and to the limited fixed cost and variable cost savings. Furthermore, we find that the financial incentives offered to drop programs may be very ineffective, leading to both undesirable reform and undesirable status quo. These findings emphasize the complexities in regulating product diversity in higher education, and serve as a word of caution towards the various decentralized financial incentive schemes that have recently been introduced.