A new method to decompose profit efficiency: an application to US commercial banks

Diego Restrepo-Tobon () and Subal Kumbhakar

Journal of Productivity Analysis, 2017, vol. 48, issue 2, No 2, 117-132

Abstract: Abstract We propose a new method to estimate profit efficiency which makes explicit how revenue and cost efficiencies contribute to overall profit efficiency. Using data from US commercial banks from 2001 to 2010, we find that losses due to profit inefficiency represent about 3.5% of banks’ equity of which 1% is due to revenue inefficiency and 2.4% to cost inefficiency. Revenue efficiency changes affect more overall profit efficiency than equivalent cost efficiency changes. In contrast to previous studies, but in line with economic intuition, we find that while revenue and cost efficiencies tend to be negatively correlated, both correlate positively with profit efficiency.

Keywords: Banking; Profit efficiency; Revenue efficiency; Cost efficiency; Nonstandard profit function; Stochastic frontier (search for similar items in EconPapers)
JEL-codes: D24 G21 L13 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11123-017-0511-9

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