Dealing with Cross-Firm Heterogeneity in Bank Efficiency Estimates: Some evidence from Latin America

John Goddard, Philip Molyneux () and Jonathan Williams

No 13011, Working Papers from Bangor Business School, Prifysgol Bangor University (Cymru / Wales)

Abstract: This paper contributes to the bank efficiency literature through an application of recently developed random parameters models for stochastic frontier analysis. We estimate standard fixed and random effects models, and alternative specifications of random parameters models that accommodate cross-sectional parameter heterogeneity. A Monte Carlo simulations exercise is used to investigate the implications for the accuracy of the estimated inefficiency scores of estimation using either an under-parameterized, over-parameterized or correctly specified cost function. On average, the estimated mean efficiencies obtained from random parameters models tend to be higher than those obtained using fixed or random effects, because random parameters models do not confound parameter heterogeneity with inefficiency. Using a random parameters model, we analyse the evolution of the average rank cost efficiency for Latin American banks between 1985 and 2010. Cost efficiency deteriorated during the 1990s, particularly for state-owned banks, before improving during the 2000s but prior to the subprime crisis. The effects of the latter varied between countries and bank ownership types

Keywords: Efficiency; stochastic frontier; random parameters models; bank ownership; Latin America (search for similar items in EconPapers)
JEL-codes: C23 D24 G21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-09
New Economics Papers: this item is included in nep-ban, nep-dcm, nep-ecm, nep-eff and nep-lam
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http://www.bangor.ac.uk/business/research/documents/BBSWP13011.pdf (application/pdf)

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Journal Article: Dealing with cross-firm heterogeneity in bank efficiency estimates: Some evidence from Latin America (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bng:wpaper:13011

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