BACKGROUND: Whereas short and problematic sleep are associated with psychological problems in adolescence, causality remains to be elucidated. This study therefore utilized the discordant monozygotic cotwin design and cross-lagged models to investigate how short and problematic sleep affect psychological functioning. METHODS: Adolescent twins (N = 12,803, 13-20 years, 42% male) completed questionnaires on sleep and psychological functioning repeatedly over a two-year interval. Monozygotic twin pairs were classified as concordant or discordant for sleep duration and trouble sleeping. Resulting subgroups were compared regarding internalizing problems, externalizing problems, and subjective well-being. RESULTS: Cross-sectional analyses indicated associations of worse psychological functioning with both short sleep and problematic sleep, and cross-lagged models indicate bidirectional associations. Longitudinal analyses showed that an increase in sleep problems experienced selectively by one individual of an identical twin pair was accompanied by an increase of 52% in internalizing problem scores and 25% in externalizing problem scores. These changes were significantly different from the within-subject changes in cotwins with unchanged sleep quality (respectively, 3% increase and 5% decrease). Psychological functioning did, however, not worsen with decreasing sleep duration. CONCLUSIONS: The findings suggest that sleep quality, rather than sleep duration, should be the primary target for prevention and intervention, with possible effect on psychological functioning in adolescents.