The joint estimation of bank-level market power and efficiency

Manthos D. Delis () and Efthymios Tsionas

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of this study is to provide a methodology for the joint estimation of efficiency and market power of individual banks. The proposed method utilizes the separate implications of the new empirical industrial organization and the stochastic frontier literatures and suggests identification using the local maximum likelihood (LML) technique. Through LML, estimation of market power of individual banks becomes feasible, while a number of restrictive theoretical and empirical assumptions are relaxed. The empirical analysis is carried out on the basis of EMU and US bank data and the results suggest small differences in the market power and efficiency levels of banks between the two samples. Market power estimates indicate fairly competitive conduct in general; however, heterogeneity in market power estimates is substantial across banks within each sample. The latter result suggests that while the banking industries examined are fairly competitive in general, the practice of some banks deviates from the average behavior, and this finding has important policy implications. Finally, efficiency and market power present a negative relationship, which is in line with the so-called “quiet life hypothesis”.

Keywords: Efficiency; market power; local maximum likelihood (search for similar items in EconPapers)
JEL-codes: L11 C14 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-com and nep-eff
Date: 2009-01-07
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Journal Article: The joint estimation of bank-level market power and efficiency (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:14040

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