Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking

FRB of Philadelphia Working Paper No. 00-05

34 Pages Posted: 21 Aug 2000

See all articles by Loretta J. Mester

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Joseph P. Hughes

Rutgers, The State University of New Jersey - Department of Economics

William W. Lang

Promontory Financial Group

Choon-Geol Moon

Hanyang University

Date Written: June 2000

Abstract

The authors argue for a shift in the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing technologies. The authors show how this shift can be implemented using the Almost Ideal Demand System. In addition, the authors suggest a more general way of measuring efficiency that can incorporate a concern for the market value of firms' assets and equity and identify value-maximizing firms. This shift in focus bridges the gap between the risk-incentives literature in banking that ignores the microeconomics of production and the production literature that ignores the relationship between production decisions and risk.

Keywords: Banking, production, risk, efficiency, agency problems

JEL Classification: D20, D21, G21, L23

Suggested Citation

Mester, Loretta J. and Hughes, Joseph P. and Lang, William W. and Moon, Choon-Geol, Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking (June 2000). FRB of Philadelphia Working Paper No. 00-05, Available at SSRN: https://ssrn.com/abstract=237841 or http://dx.doi.org/10.2139/ssrn.237841

Loretta J. Mester (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Joseph P. Hughes

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

William W. Lang

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States

HOME PAGE: http://www.promontory.com

Choon-Geol Moon

Hanyang University ( email )

17 Haegdang-dong
Seongdong-ku
Seoul, 133-791
KOREA

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