Dealing with cross-firm heterogeneity in bank efficiency estimates: Some evidence from Latin America

John Goddard, Philip Molyneux () and Jonathan Williams

Journal of Banking & Finance, 2014, vol. 40, issue C, 130-142

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 sub-prime 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)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Related works:
Working Paper: Dealing with Cross-Firm Heterogeneity in Bank Efficiency Estimates: Some evidence from Latin America (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:40:y:2014:i:c:p:130-142

DOI: 10.1016/j.jbankfin.2013.11.025

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