A General Method of Deriving the Efficiencies of Banks from a Profit Function

Posted: 24 Oct 1999

See all articles by Jalal D. Akhavein

Jalal D. Akhavein

Fitch Ratings Inc.

P.A.V.B. Swamy

Bureau of Labor Statistics

Stephen B. Taubman

Government of the United States of America - Division of Research and Statistics

Date Written: August 1994

Abstract

This paper develops a new method of estimating the inefficiencies of firms and points out that unlike the approaches utilized in the previous studies of inefficiency that specify share or similar equations along with a cost or profit function, this method makes a consistent set of general assumptions. The method is applied in the analysis of annual data, 1984-1989, for U.S. commercial banks. The results of the paper show that the residual which the previous studies attribute to technical inefficiency includes the effects of excluded variables, of inaccuracies in the specified functional forms, and of using inconsistent parameter estimates. They further show that once these effects are subtracted from the residual, the measured inefficiencies are substantially reduced.

JEL Classification: G20, C51

Suggested Citation

Akhavein, Jalal D. and Swamy, Paravastu A.V.B. and Taubman, Stephen B., A General Method of Deriving the Efficiencies of Banks from a Profit Function (August 1994). Available at SSRN: https://ssrn.com/abstract=5604

Jalal D. Akhavein (Contact Author)

Fitch Ratings Inc. ( email )

One State Street Plaza
New York, NY 10004
United States

Paravastu A.V.B. Swamy

Bureau of Labor Statistics

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

Stephen B. Taubman

Government of the United States of America - Division of Research and Statistics

20th and C Streets, NW
Washington, DC 20551
United States

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