Nonparametric Estimation of Lerner Indices for U.S. Banks Allowing for Inefficiency and Off-Balance Sheet Activities

76 Pages Posted: 17 Apr 2019 Last revised: 22 Feb 2020

See all articles by David C. Wheelock

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Paul W. Wilson

Clemson University - John E. Walker Department of Economics; University of Texas at Austin - Department of Economics

Date Written: 2019-04-16

Abstract

The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for inefficiency and off-balance-sheet output.

Keywords: Lerner index, banks, market power, nonparametric regression

JEL Classification: C12, C13, C14, G21, L13

Suggested Citation

Wheelock, David C. and Wilson, Paul W., Nonparametric Estimation of Lerner Indices for U.S. Banks Allowing for Inefficiency and Off-Balance Sheet Activities (2019-04-16). FRB St. Louis Working Paper No. 2019-12. Available at SSRN: https://ssrn.com/abstract=3373206 or http://dx.doi.org/10.20955/wp.2019.012

David C. Wheelock (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Paul W. Wilson

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
65
Abstract Views
219
rank
358,528
PlumX Metrics