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Measuring Profit Efficiency of Colombian Banks: A Composite Nonstandard Profit Function Approach

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  • Diego Restrepo-Tobón
  • Jim Sánchez-González

Abstract

We analyze the profit efficiency of the Colombian banking industry during theperiod 2001 - 2013. Unlike previous studies, we estimate revenue and cost efficiencyseparately and then compute profit efficiency as a composite measure of both costand revenue efficiency. This approach overcomes the mis-specification problems ofthe traditional nonstandard profit function approach used in most of the literatureregarding profit efficiency. We find that profit efficiency improved during the periodunder analysis mainly because gains in revenue efficiency. In addition, and in contrastwith previous studies but in line with economic intuition, we find that while revenue andcost efficiency tend to be negatively correlated, each correlates positively with profitefficiency. Thus, improving either revenue efficiency or cost efficiency has a positiveimpact on profit efficiency.

Suggested Citation

  • Diego Restrepo-Tobón & Jim Sánchez-González, 2018. "Measuring Profit Efficiency of Colombian Banks: A Composite Nonstandard Profit Function Approach," Documentos de Trabajo de Valor Público 16789, Universidad EAFIT.
    • Handle: RePEc:col:000122:016789
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    References listed on IDEAS

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    1. Leonardo Villar Gómez, 2004. "Inflación y finanzas públicas," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 22(47), pages 56-105, December.
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    5. Michel Janna Gandur, 2003. "Eficiencia en Costos,Cambios en las Condiciones Generales del Mercado y Crisis en la Banca Colombiana: 1992-2002," Borradores de Economia 260, Banco de la Republica de Colombia.
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    11. Bos, J.W.B. & Koetter, M. & Kolari, J.W. & Kool, C.J.M., 2009. "Effects of heterogeneity on bank efficiency scores," European Journal of Operational Research, Elsevier, vol. 195(1), pages 251-261, May.
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    More about this item

    Keywords

    Profit Efficiency; Revenue Efficiency; Cost Efficiency; Nonstandard Profit Function; Stochastic Frontier;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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