A Bayesian Approach to Nonparametric Frontier Model Selection: Application to U.S. Banks Cost Functions

36 Pages Posted: 15 Jan 2025

See all articles by Oleg Badunenko

Oleg Badunenko

Brunel University London

Kristiaan Kerstens

CNRS-LEM (UMR 9221); Catholic University of Lille - IESEG School of Management

Stefano Nasini

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Mike G. Tsionas

Montpellier Business School

Date Written: January 01, 2022

Abstract

This contribution proposes a novel Bayesian approach to nonparametric frontier model selection based on the probabilistic framework of Laplace-type estimators. Our empirical analysis of U.S. banks provides strong evidence in favor of the nonconvexity of cost functions for any given returns to scale assumption. Furthermore, while convex and nonconvex methods agree that the large majority of observations experiences increasing economies of scale, we find conflicting evidence with regard to the economies of scale of the cost function with respect to the convexity assumption for about 20% of the sample. These results have potentially far reaching consequences. For the economic theory, the rejection of the convexity assumption casts an empirical doubt on the validity of fundamental microeconomic results. For the banking practice, the incorrect classification of the economy of scale might lead to false policy recommendation (such as mergers and acquisition).

Keywords: Bayesian analysis, Nonparametric frontier models, Nonconvex cost functions

JEL Classification: C11, D24, G21

Suggested Citation

Badunenko, Oleg and Kerstens, Kristiaan and Nasini, Stefano and Tsionas, Mike G., A Bayesian Approach to Nonparametric Frontier Model Selection: Application to U.S. Banks Cost Functions (January 01, 2022). Available at SSRN: https://ssrn.com/abstract=5042567 or http://dx.doi.org/10.2139/ssrn.5042567

Oleg Badunenko

Brunel University London

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Kristiaan Kerstens

CNRS-LEM (UMR 9221) ( email )

60 Boulevard Vauban
BP 109
Lille Cedex, 59016
France

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Lille, 59000
France

Stefano Nasini (Contact Author)

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Lille, Lille 59000
France

HOME PAGE: http://https://www.ieseg.fr/

Mike G. Tsionas

Montpellier Business School ( email )

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