Inefficient or Just Different? Effects of Heterogeneity on Bank Efficiency Scores

Deutsche Bundesbank Discussion Paper No. 2

Banking and Financial Studies Paper No. 15/2005

48 Pages Posted: 28 Feb 2006

See all articles by Jaap W.B. Bos

Jaap W.B. Bos

Maastricht University

Frank Heid

Deutsche Bundesbank

Michael Koetter

Halle Institute for Economic Research

James W. Kolari

Texas A&M University - Department of Finance

Clemens J.M. Kool

Utrecht University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

Abstract

In this paper, we show the importance of accounting for heterogeneity among sample firms in stochastic frontier analysis. For a fairly homogenous sample of German savings and cooperative banks, we analyze how alternative theoretical assumptions regarding the nature of heterogeneity can be modeled and the extent which the respective empirical specifications affect estimated efficiency levels and rankings. We find that the level of efficiency scores is affected in the case of both cost and profitmodels. On the cost side especially, level and rank correlations show that different specifications identify different banks as being best or worst performers. Our main conclusion is that efficiency studies in general and bank efficiency studies in particular should account for heterogeneity across sample firms. Especially when efficiency measures are employed for policy purposes, a careful choice of models and transparency regarding maximization methods are essential to be able to make inferences about managerial behavior.

Keywords: Heterogeneity, X-efficiency, benchmarking, bank production

JEL Classification: G21, G34, G14

Suggested Citation

Bos, Jaap W.B. and Heid, Frank and Koetter, Michael and Kolari, James W. and Kool, Clemens J.M., Inefficient or Just Different? Effects of Heterogeneity on Bank Efficiency Scores (2005). ; Banking and Financial Studies Paper No. 15/2005. Available at SSRN: https://ssrn.com/abstract=886481 or http://dx.doi.org/10.2139/ssrn.886481

Jaap W.B. Bos

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Frank Heid

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Michael Koetter (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Clemens J.M. Kool

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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