The differential effect of competitive university funding on production frontier and efficiency

Abstract

This paper uses a panel data set containing universities across eight European countries to model an output distance function and analyze the impact of three competitive funding types on the production frontier and the university effciency. We find little evidence for an effect of the budget share financed by tuition fees or private funds on the production frontier, but a significantly negative impact of international public funds. Similarly, only international public funds have an effect on effiency. These findings are consistent with the hypothesis, that competitive funding reduces the frontier due to monitoring costs, but increases competition and therefore decreases ineffciency. Our findings remain robust to the inclusion of country-specific dummies and time trends, the use of lagged values and country averages as instruments and the variation of the identification strategy for university effciency.