This paper develops a theoretical framework for the impact of competitive university funding, suggesting that the direction of the effect might differ between the production frontier and effciency. We test the models predictions using a panel data set at micro-level across eight European countries to estimate a simultaneous two-stage stochastic frontier approach. Supporting our predictions, the results show that tuition fees have a positive impact on the production frontier, but a negative one on effciency. Conversely, public international funds reduce the production frontier, but increase effciency. These findings
suggest that introducing competition in the university sector entails a trade-off that should be taken into account by politicians.