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Measuring Competition in Banking : A Disequilibrium Approach

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Author Info

  • John Goddard

    (Bangor Business School, University of Wales)

  • John O.S. Wilson

    (School of Managent, University of St. Andrews)

Abstract

The "Rosse-Panzar" revenue test for competitive conditions in banking is based on observation of the impact on bank revenue of variation in factor input prices. We identify the implications for the H-statistics of misspecification bias in the revenue equation arising when adjustment towards market equilibrium is partial and not instantaneous. In simulation, fixed effects estimation produces a measured H-statistic that is severely biased towards zero. Empirical results for the banking sectors of six developed countries corroborate our principal finding, that a dynamic formulation of the revenue equation is required for accurate identification of the H-statistics.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0808.

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Length: 31 pages
Date of creation: 2008
Date of revision: Apr 2008
Handle: RePEc:eie:wpaper:0808

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  1. Jacob Bikker & Laura Spierdijk & Paul Finnie, 2006. "Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry," DNB Working Papers, Netherlands Central Bank, Research Department 114, Netherlands Central Bank, Research Department.
  2. Barbara Casu & Claudia Girardone, 2006. "Bank Competition, Concentration And Efficiency In The Single European Market," Manchester School, University of Manchester, University of Manchester, vol. 74(4), pages 441-468, 07.
  3. International Monetary Fund, 2007. "Italy," IMF Working Papers, International Monetary Fund 07/26, International Monetary Fund.
  4. J.A. Bikker & Laura Spierdijk & P. Finnie, 2007. "The impact of market structure, contestability and institutional environment on banking competition," Working Papers, Utrecht School of Economics 07-29, Utrecht School of Economics.
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