The Causal Linkages between Market Power and Cost Efficiency: Testing Quiet Life Hypothesis for the Banking Industry

Ayesha Hameed, Tahir Saeed Jagirani, Mohammad Qamar Qureshi and Aisha Riaz
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Ayesha Hameed: Institute of Business Management, Karachi, Pakistan
Tahir Saeed Jagirani: School of Economics, Finance and Banking, University Utara Malaysia (UUM), Malaysia
Mohammad Qamar Qureshi: Anglia Ruskin University, United Kingdom
Aisha Riaz: Department of Management Sciences, University of Okara, Okara, Pakistan

Bulletin of Business and Economics (BBE), 2024, vol. 13, issue 1, 803-811

Abstract: This study aims to test the quiet life hypothesis considering the impact of market power on cost efficiency in Pakistani banks where managers of the banking industry slacken their efforts to enjoy a ‘quiet life’ due to market power and are not focused on the cost efficiency of their banks. Thus, banks with high market power are relatively less focused on the efficient allocation of resources, resulting in a loss of consumer surplus and efficiency. We take panel data for a sample of 25 commercial banks throughout 2006-2019. Our findings suggest Uni-directional causality running from cost efficiency towards market power in the case of Pakistan. In addition, to control for endogeneity, we adopt a dynamic two-step system GMM approach to model the relationship between market power and cost efficiency. Our findings suggest significantly negative effects of cost efficiency over market power, disproving the presence of quiet life in the case of Pakistan. This study provides substantial theoretical contributions in the form of the Quiet life hypothesis and welfare performance of banks. However, to the best of our knowledge, the causal linkages and the effects of market power on cost efficiency or vice versa are not documented for the banking industry of Pakistan.

Keywords: Banking industry; Market power; Cost efficiency; Quiet Life hypothesis; GMM Model; Grange Causality (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:rfh:bbejor:v:13:y:2024:i:1:p:803-811

DOI: 10.61506/01.00272

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