IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

A general method of deriving the efficiencies of banks from a profit function

  • P.A.V.B. Swamy
  • Jalal D. Akhavein
  • Stephen B. Taubman

Questions of whether the evolution of the financial services industry results in more efficient intermediaries, better prices and service quality for consumers, and greater bank safety and soundness cannot be answered without addressing the cost and revenue efficiencies of the industry. Most studies of the efficiency of financial institutions have used an econometric approach to measure efficiency. This paper tries to address potential econometric problems of previous efficiency studies and suggests a new technique for measuring efficiency. This method is applied to data on U.S. commercial banks from 1984 through 1989. Previous studies used one of four different approaches for estimating X-efficiencies - the econometric frontier approach, the thick frontier approach, data envelopment analysis, and the distribution free approaches. In all four cases, the econometric problem of estimating X-efficiencies is defined simply as one of distinguishing between two components of a random error term added to a cost or profit function. The authors suggest that it is possible that the actual econometric problem of estimating X-inefficiencies is not as simple as the problem of distinguishing between two random components because of the following three reasons: ( i ) the true functional forms of the cost or profit functions of the firms are usually unknown; ( ii ) explanatory variables excluded from the cost or profit function are likely to be correlated with the explanatory variables included in the function; and (iii) inconsistencies may arise if arbitrary error terms are added to a cost or profit function and their corresponding share equations. The authors use a fixed-coefficients model that allows them to address the econometric problems mentioned above. This methodology also allows for the estimation of a separate frontier for each firm as opposed to previous studies that estimate one frontier which is common to all firms. The results of the paper show that the residual wh

(This abstract was borrowed from another version of this item.)

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 94-11.

as
in new window

Length:
Date of creation: 1994
Date of revision:
Handle: RePEc:fip:fedgfe:94-11
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/
More information through EDIRC

Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:94-11. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.