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Inefficient or just different? Effects of heterogeneity on bank efficiency scores

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  • Bos, Jaap W. B.
  • Heid, Frank
  • Koetter, Michael
  • Kolari, James W.
  • Kool, Clemens J. M.

Abstract

In this paper, we show the importance of accounting for heterogeneity among sample firms in stochastic frontier analysis. For a fairly homogenous sample of German savings and cooperative banks, we analyze how alternative theoretical assumptions regarding the nature of heterogeneity can be modeled and the extent to which the respective empirical specifications affect estimated efficiency levels and rankings. We find that the level of efficiency scores is affected in the case of both cost and profitmodels. On the cost side especially, level and rank correlations show that different specifications identify different banks as being best or worst performers. Our main conclusion is that efficiency studies in general and bank efficiency studies in particular should account for heterogeneity across sample firms. Especially when efficiency measures are employed for policy purposes, a careful choice of models and transparency regarding maximization methods are essential to be able to make inferences about managerial behavior. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2005,15.

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Date of creation: 2005
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Handle: RePEc:zbw:bubdp2:4270

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Keywords: Heterogeneity; X-efficiency; benchmarking; bank production;

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References

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Citations

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Cited by:
  1. Koetter, Michael & Wedow, Michael, 2010. "Finance and growth in a bank-based economy: Is it quantity or quality that matters?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1529-1545, December.
  2. Bonanno, Graziella, 2012. "L’efficienza del sistema bancario italiano dal 2006 al 2010. Un’applicazione delle frontiere stocastiche
    [The Efficiency of Italian Banking System over 2006-2010. An Application of the Stochast
    ," MPRA Paper 42831, University Library of Munich, Germany.
  3. Francesco Aiello & Graziella Bonanno, 2013. "Profit and cost efficiency in the Italian banking industry (2006-2011)," Economics and Business Letters, Oviedo University Press, vol. 2(4).
  4. Bos, J.W.B. & Schmiedel, H., 2007. "Is there a single frontier in a single European banking market?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2081-2102, July.
  5. Joseph P. Hughes & Loretta J. Mester, 2008. "Efficiency in banking: theory, practice, and evidence," Working Papers 08-1, Federal Reserve Bank of Philadelphia.
  6. Michael Koetter, 2006. "Measurement Matters—Alternative Input Price Proxies for Bank Efficiency Analyses," Journal of Financial Services Research, Springer, vol. 30(2), pages 199-227, October.
  7. Koetter, Michael, 2006. "The stability of efficiency rankings when risk-preferences and objectives are different," Discussion Paper Series 2: Banking and Financial Studies 2006,08, Deutsche Bundesbank, Research Centre.
  8. Joseph P. Hughes & Loretta J. Mester, 2013. "Measuring the performance of banks: theory, practice, evidence, and some policy implications," Working Papers 13-31, Federal Reserve Bank of Philadelphia.

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