There are broad concerns in Italy about public sector efficiency. Within the public sector higher education (HE) has a major role, providing the economy with research outputs and graduates. Italian universities claim to have expanded teaching and research services to keep pace with the growth of the "knowledge society." An important question is whether this expansion is benefiting the Italian HE sector. To address this issue, the cost structure of Italian university system is examined. A quadratic cost function is employed to test both the existence of efficiency linkages between teaching and research services and the presence of scale economies. These results are used to investigate the implications of a more specialized HE sector. (Contains 13 tables and 9 footnotes.)