Measuring Competition in Banking: A Disequilibrium Approach

John Goddard and John Wilson

No 808, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: The "Rosse-Panzar" revenue test for competitive conditions in banking is based on observation of the impact on bank revenue of variation in factor input prices. We identify the implications for the H-statistics of misspecification bias in the revenue equation arising when adjustment towards market equilibrium is partial and not instantaneous. In simulation, fixed effects estimation produces a measured H-statistic that is severely biased towards zero. Empirical results for the banking sectors of six developed countries corroborate our principal finding, that a dynamic formulation of the revenue equation is required for accurate identification of the H-statistics.

Pages: 31 pages
Date: 2008, Revised 2008-04
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Citations: View citations in EconPapers (2)

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