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
Date Written: June 2000
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: Suggested Citation