The Investigation of Heterogeneous Productions Technologies: Implications for the Banking Efficiency

Abstract:     
Surveys of bank efficiency intrinsically draw conclusions based on the assumption that all banks in a sample use the same production technology. Neglecting the existence of unobserved differences in technological regimes might distort efficiency estimates by assigning incorrectly these deviations as inefficiency. We approach these consideration by estimating the unobserved heterogeneity in banking technologies in a latent class stochastic frontier model. We quote an application of the model by using data of the Greek banking sector for the period 1993-2008.Our results reveal that the Greek bank-heterogeneity can be controlled by two technological regimes. In addition, managerial choices influence the technology of Greek banks. Based on the changes of the efficiency scores of the banks we extract inferences with policy implications in the spectrum of social welfare effects.

Number of Pages in PDF File: 37

Keywords: Bank efficiency, stochastic cost frontier, latent class, panel data

JEL Classification: C81, D24, G21

working papers series