Different contracts in the Civil Code for different organizations in the market: comparing co-operative and stock banks using a cost frontier approach

In this paper, I propose an empirical test of the main prediction of the theoretical literature on the firm as an incentive structure using data on the Italian markets, where two types of co-operative banks co-exist together with stock banks. I estimate a standard translog cost frontier and I derive cost efficiency scores. Kruskall–Wallis tests indicate that mean efficiency scores are statistically different among the three types of banks, providing empirical support to the theoretical prediction that different organizations represent different incentive structures. Moreover, co-operatives banks appear more efficient than stock banks. These results are robust also after controlling for the size of banks and the quality of their credit policies in a second-stage analysis. Hence, the efficiency gains stemming from the presence of scale economies seem to be dominated by the efficiency losses caused by the agency relationships within the bank in a more complex organization.