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Rational Cost Inefficiency in Chinese Banks

  • Kent Matthews

    (Cardiff University, Hong Kong Institute for Monetary Research)

  • Zhiguo Xiao

    (Fudan University,)

  • Xu Zhang

    (Citigroup (China), Cardiff University)

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 Hong Kong Institute for Monetary Research in its series Working Papers with number 292009.

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Length: 32 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:hkm:wpaper:292009
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