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The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico

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  • Barros, Carlos Pestana
  • Williams, Jonathan

Abstract

We apply specifications of the random parameters stochastic frontier cost function model to estimate bank efficiency. This class of model appears to resolve the long standing problem of confounding inefficiency and heterogeneity. Mean cost efficiencies from random models are higher by as much as eleven percentage points compared to pooled OLS estimates. Whilst tests show efficiencies are not drawn from the same population, rank order efficiencies are strongly associated. In a second step, we employ the estimated efficiencies to determine the effect of foreign acquisitions on bank cost efficiency following legislative reforms made as part of Mexico's bank restructuring programme in 1995. Foreign bank acquisition does not significantly affect efficiency whereas consolidation of local banks yields significant long-term improvements in efficiency. We recommend random parameters stochastic frontier models since they better accommodate heterogeneity and produce more precise estimated efficiencies.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 30 (2013)
Issue (Month): C ()
Pages: 98-108

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Handle: RePEc:eee:finana:v:30:y:2013:i:c:p:98-108

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Web page: http://www.elsevier.com/locate/inca/620166

Related research

Keywords: Mexico; Banks; Stochastic frontier; Random parameters; Efficiency; Foreign banks;

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References

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Cited by:
  1. Goddard, John & Molyneux, Philip & Williams, Jonathan, 2014. "Dealing with cross-firm heterogeneity in bank efficiency estimates: Some evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 130-142.
  2. Barros, Carlos Pestana & Wanke, Peter, 2014. "Banking efficiency in Brazil," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 54-65.

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