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The joint estimation of bank-level market power and efficiency

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  • Delis, Manthos D
  • Tsionas, Efthymios

Abstract

The aim of this study is to provide a methodology for the joint estimation of efficiency and market power of individual banks. The proposed method utilizes the separate implications of the new empirical industrial organization and the stochastic frontier literatures and suggests identification using the local maximum likelihood (LML) technique. Through LML, estimation of market power of individual banks becomes feasible, while a number of restrictive theoretical and empirical assumptions are relaxed. The empirical analysis is carried out on the basis of EMU and US bank data and the results suggest small differences in the market power and efficiency levels of banks between the two samples. Market power estimates indicate fairly competitive conduct in general; however, heterogeneity in market power estimates is substantial across banks within each sample. The latter result suggests that while the banking industries examined are fairly competitive in general, the practice of some banks deviates from the average behavior, and this finding has important policy implications. Finally, efficiency and market power present a negative relationship, which is in line with the so-called “quiet life hypothesis”.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14040.

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Date of creation: 07 Jan 2009
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Handle: RePEc:pra:mprapa:14040

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Keywords: Efficiency; market power; local maximum likelihood;

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Citations

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Cited by:
  1. T.V.S. Ramamohan Rao, 2012. "Firm Specific Monopoly Power in Differentiated Oligopoly," Journal of Quantitative Economics, The Indian Econometric Society, The Indian Econometric Society, vol. 10(1), pages 85-97, January.
  2. Delis, Manthos D., 2012. "Bank competition, financial reform, and institutions: The importance of being developed," Journal of Development Economics, Elsevier, Elsevier, vol. 97(2), pages 450-465.
  3. Nguyen, My & Skully, Michael & Perera, Shrimal, 2012. "Bank market power and revenue diversification: Evidence from selected ASEAN countries," Journal of Asian Economics, Elsevier, Elsevier, vol. 23(6), pages 688-700.
  4. Bolt, Wilko & Humphrey, David, 2010. "Bank competition efficiency in Europe: A frontier approach," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(8), pages 1808-1817, August.
  5. Timothy King & Jonathan Williams, 2013. "Bank Efficiency and Executive Compensation," Working Papers 13009, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  6. Van Tassel, Eric, 2011. "Information disclosure in credit markets when banks' costs are endogenous," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 490-497, February.
  7. Benjamin Miranda Tabak & Guilherme Maia Rodrigues Gomes & Maurício da Silva Medeiros Júnior, 2012. "The Impact of Market Power at Bank Level in Risk-taking: the Brazilian case," Working Papers Series, Central Bank of Brazil, Research Department 283, Central Bank of Brazil, Research Department.
  8. Delis, Manthos D & Tran, Kien & Tsionas, Efthymios, 2009. "Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus," MPRA Paper 18526, University Library of Munich, Germany.
  9. Alin Marius Andrieş & Bogdan Căpraru, 2012. "Competition and efficiency in EU27 banking systems," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, Baltic International Centre for Economic Policy Studies, vol. 12(1), pages 41-60, July.
  10. Turk Ariss, Rima, 2010. "On the implications of market power in banking: Evidence from developing countries," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(4), pages 765-775, April.
  11. Chen, Sheng-Hung & Liao, Chien-Chang, 2011. "Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(4), pages 819-839, April.
  12. Samantas, Ioannis, 2013. "Income-specific estimates of competition in European banking," MPRA Paper 51098, University Library of Munich, Germany.
  13. George Assaf, A. & Matousek, Roman & Tsionas, Efthymios G., 2013. "Turkish bank efficiency: Bayesian estimation with undesirable outputs," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(2), pages 506-517.
  14. Zhang, Jianhua & Jiang, Chunxia & Qu, Baozhi & Wang, Peng, 2013. "Market concentration, risk-taking, and bank performance: Evidence from emerging economies," International Review of Financial Analysis, Elsevier, Elsevier, vol. 30(C), pages 149-157.
  15. Williams, Jonathan, 2012. "Efficiency and market power in Latin American banking," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 263-276.
  16. Cyree, Ken B. & Spurlin, W. Paul, 2012. "The effects of big-bank presence on the profit efficiency of small banks in rural markets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(9), pages 2593-2603.
  17. Koetter, Michael & Poghosyan, Tigran, 2009. "The identification of technology regimes in banking: Implications for the market power-fragility nexus," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(8), pages 1413-1422, August.
  18. Cipollini, Andrea & Fiordelisi, Franco, 2012. "Economic value, competition and financial distress in the European banking system," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(11), pages 3101-3109.
  19. Kutlu, Levent & Sickles, Robin C., 2012. "Estimation of market power in the presence of firm level inefficiencies," Journal of Econometrics, Elsevier, Elsevier, vol. 168(1), pages 141-155.

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