Students could lose out in drive to improve efficiency

Frank Verboven, Stijn Kelchtermans, Mon, 10/08/2007



The publicly financed systems of higher education in Europe have recently come under increased scrutiny to increase their efficiency. As most governments are still reluctant to raise private contributions through tuition fees, instead they have taken measures to reduce the wide duplication of study programmes across a large number of campuses. The policies are based on the common belief that this reduced product diversity saves on fixed costs without generating too large losses to the consumers. The authors of CEPR DP6508 study the welfare and profit effects of dropping duplicated programmes at individual institutions and find that this tends to be socially undesirable, due to limited cost savings and students’ relatively low mobility.

A funding system reform proposed by the Flemish government in Belgium (2005) is examined, where universities and colleges obtain their subsidies based on an achieved concentration index measuring the average number of students per programme. It therefore provides financial incentives to institutions to drop some of their study programmes. Estimating a model of undergraduate educational choice and accounting for the determinants of the students’ decisions where and what to study, the authors find the social desirability of cutting programmes is limited to less than 10% of the cases. While reducing product diversity does lead to savings, these are typically outweighed by the costs to the consumer in terms of either increased journey time or, as result of students’ low willingness to travel, reduced choice of programme. Furthermore, the use of concentration index may be very ineffective and can miss its purpose by providing decentralized financial incentives to cut the wrong programmes. There tends to be a severe mismatch leading to both undesirable reform and an undesirable status quo.

The findings emphasize the complexities in regulating product diversity in higher education and serve as a word of caution towards the various financial measures and schemes that have recently been introduced. Policy makers often appear to be preoccupied with the fixed cost savings following programme cuts, but these can be too limited when traded off against the welfare effects of implied consumer surplus losses.

DP6508 Reducing Product Diversity in Higher Education

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Topics:  Education

Tags:  higher education, product diversity

CEPR Policy Research