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Rational Cost Inefficiency in Chinese Banks

According to a frequently cited finding by Berger et al (1993), X-inefficiency contributes 20% to cost-inefficiency in western banks. Empirical studies of Chinese banks tend to place cost-inefficiency in the region of 50%. Such estimates would suggest that Chinese banks suffer from gross cost inefficiency. Using a non-parametric bootstrapping method, this study decomposes cost-inefficiency in Chinese banks into X-inefficiency and allocative-inefficiency. It argues that allocative inefficiency is the optimal outcome of input resource allocation subject to enforced employment constraints. The resulting analysis suggests that allowing for rational allocative inefficiency; Chinese banks are no better or worse than their western counterparts.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/13.

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Length: 34 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cdf:wpaper:2009/13
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