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Privatization, foreign bank entry and bank efficiency in Croatia: a Fourier-flexible function stochastic cost frontier analysis

Author

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  • Evan Kraft
  • Richard Hofler
  • James Payne

Abstract

Using bank balance sheet data for Croatia for 1994 to 2000, this study estimates a Fourier-flexible frontier cost function. Specification tests indicate that the stochastic frontier model with a Fourier-flexible form with a truncated normal distribution of the inefficiency term allowing for time varying cost efficiency is preferred. The results show that new private and privatized banks, contrary to some expectations, are not the most efficient banks through most of the period. Privatization also does not seem to have an immediate effect on improved efficiency. However, better cost efficiency is associated with a lower likelihood of failure, suggesting that better risk management and better cost management are signs of better management in general. Finally, foreign banks have substantially better efficiency scores than all categories of domestic banks.

Suggested Citation

  • Evan Kraft & Richard Hofler & James Payne, 2006. "Privatization, foreign bank entry and bank efficiency in Croatia: a Fourier-flexible function stochastic cost frontier analysis," Applied Economics, Taylor & Francis Journals, vol. 38(17), pages 2075-2088.
    • Handle: RePEc:taf:applec:v:38:y:2006:i:17:p:2075-2088
    DOI: 10.1080/00036840500427361
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics

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