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Efficiency and Information Asymmetry in the Iranian Banking System

Author

Listed:
  • Ghaffari , Farhad

    (Associate Professor, Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran)

  • Mashhadi , Reza

    (Ph.D. student of Economics, Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran)

  • Hosseini , Seyed Shamseddin

    (Assistant Professor, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran)

  • Peykarjou , Kambiz

    (Assistant Professor, Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran)

Abstract

The soundness and efficiency of banks is one of the important subjects that neglecting it can have adverse consequences for every country's economy. For economies depending on the money market, such as the Iran economy, this subject is more critical. Therefore, in this study, using panel data related to 16 Iranian banks for the annual period of 2010-2017, the economic efficiency was determined using a translog cost function and stochastic frontier analysis method then, by estimating the model of panel vector autoregression model and Granger causality test, the causal relationships between efficiency and information asymmetry in terms of adverse selection ( the ratio of loans to assets and the ratio of loans to deposits) and moral hazard ( the ratio of non-performing loans), were investigated, both of which are caused due to the information asymmetry. The estimations confirm the unilateral causal relationship of adverse selection and moral hazard with banking system efficiency. And, on the contrary, they claim that low efficiency of the banking system increases the adverse selection and moral hazard is not confirmed. Besides, the results of other estimates based on the panel model with random effects indicate a negative and significant impact of moral hazard and adverse selection on efficiency.

Suggested Citation

  • Ghaffari , Farhad & Mashhadi , Reza & Hosseini , Seyed Shamseddin & Peykarjou , Kambiz, 2019. "Efficiency and Information Asymmetry in the Iranian Banking System," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(3), pages 421-440, July.
    • Handle: RePEc:mbr:jmonec:v:14:y:2019:i:3:p:421-440
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    More about this item

    Keywords

    Cost efficiency; stochastic frontier analysis; Information asymmetry; panel vector auto-regression; Granger causality test.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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