Imposing Regularity Conditions to Measure Banks’ Productivity Changes in Taiwan Using a Stochastic Approach

Tai-Hsin Huang (), Yi-Huang Chiu () and Chih-Ying Mao ()
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Tai-Hsin Huang: National Chengchi University
Yi-Huang Chiu: National Chengchi University
Chih-Ying Mao: National Chengchi University

Asia-Pacific Financial Markets, 2021, vol. 28, issue 2, No 5, 273-303

Abstract: Abstract This paper develops a stochastic approach to impose regularity properties on a directional output distance function (DODF) and an output distance function, which can be estimated by maximum likelihood. We use the resulting parameter estimates to evaluate efficiency and total factor productivity (TFP) growth for Taiwan’s commercial banks over the period 2002–2015 and claim that the failure of considering the regularity restrictions and the exclusion of undesirables lead to miscalculated efficiency measures and productivity gains. The outcomes from the regularity-constrained DODF reveal that almost all data-points satisfy the regularity properties, that the managerial abilities of the banks improve after the subprime crisis of 2007, and that the sample banks’ TFP grow at an average rate of 1.93% per annum, whereby technical change is the driving force. However, our estimates show downward trends in the growth rate of TFP and technical change.

Keywords: Stochastic approach; Regularity properties; Maximum likelihood; TFP growth; Undesirables (search for similar items in EconPapers)
JEL-codes: C30 C51 D24 G21 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10690-020-09319-z

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