Off-Balance Sheet Activities, Inefficiency and Market Power of U.S. Banks
88 Pages Posted: 17 Apr 2019
Date Written: 2019-04-16
The Lerner index is a well-established measure of firms' market power, but estimation and interpretation present several challenges, especially for banks. We estimate Lerner indices for U.S. banks for 2001-2016 while (i) accounting for banks' off-balance sheet activities, (ii) estimating cost and profit functions nonparametrically to avoid mis-specification inherent in parametric estimation of translog functions on banking data, and (iii) allowing for cost and profit inefficiency that can otherwise bias index estimates. We find that banks have more market power than previous studies found, and that failure to account for off-balance-sheet activities or inefficiency can seriously bias estimates of market power.
Keywords: banks, concentration, market power, nonparametric regression
JEL Classification: C12, C13, C14, G21, L13
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