Microfoundations for Performance, Competition and Econometric Implications

48 Pages Posted: 21 Nov 2017 Last revised: 22 Nov 2017

See all articles by Levent Kutlu

Levent Kutlu

University of Texas Rio Grande Valley

Emmanuel Mamatzakis


Mike Tsionas

Lancaster University

Date Written: 2017


We consider two agency-theory-based structural models and a reduced form model of bank inefficiency. The two structural models assume that the inefficiencies and quantities are sequentially and simultaneously determined, respectfully. The reduced form model assumes that inefficiency of a bank depends on other banks' inefficiencies. We argue that conventional stochastic frontier models would give inconsistent parameter estimates as they ignore systematic nature of managerial decision making process. We estimate the inefficiencies of Eurozone banks using our novel structural and reduced form approaches that calls for certain MCMC techniques. Bayes factor favors the sequential model where the efficiency is determined first. In the empirical application for the Eurozone, we find a pick in structural and non-structural inefficiency after the financial crisis and considerable variability across Member States. A way of tackling such banking imbalances is to move towards a banking union.

Keywords: Banking, Sources of efficiency, Competition, Bayesian estimation

JEL Classification: C11, C13, G21

Suggested Citation

Kutlu, Levent and Mamatzakis, Emmanuel and Tsionas, Efthymios G., Microfoundations for Performance, Competition and Econometric Implications (2017). Available at SSRN: https://ssrn.com/abstract=3073430 or http://dx.doi.org/10.2139/ssrn.3073430

Levent Kutlu (Contact Author)

University of Texas Rio Grande Valley ( email )

1201 West University Dr
Edinburg, TX TX 78539
United States

HOME PAGE: http://https://faculty.utrgv.edu/levent.kutlu/

Emmanuel Mamatzakis

Independent ( email )

Efthymios G. Tsionas

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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