Joint estimation of the Lerner index and cost efficiency using copula methods

Tai-Hsin Huang (), Nan-Hung Liu () and Subal Kumbhakar
Additional contact information
Tai-Hsin Huang: National Chengchi University
Nan-Hung Liu: National Chengchi University

Empirical Economics, 2018, vol. 54, issue 2, No 18, 799-822

Abstract: Abstract This paper deals with the estimation of market power, measured by the Lerner index, and cost efficiency at the bank level, using the stochastic frontier (SF) methodology. Both market power and cost efficiency are estimated jointly in a single step. We use the copula method to incorporate dependence between market power and cost efficiency. In contrast to earlier works that used a two-step approach, the SF approach used herein estimates a bank-specific nonnegative Lerner index free from random shocks. We showcase the advantages of our proposed methodology in terms of an empirical study on the banking sectors of five former communist countries during the period 2000–2008. Compared to the conventional approach, our model gives higher mean values of the Lerner index and smaller standard deviations. Further, we find a significant positive relationship between cost efficiency and market power of banks, thereby rejecting the “quiet life hypothesis.”

Keywords: Copula methods; Cost efficiency; Lerner index; Market power; Quiet life hypothesis (search for similar items in EconPapers)
JEL-codes: C31 C51 G21 L11 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://link.springer.com/10.1007/s00181-016-1216-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:54:y:2018:i:2:d:10.1007_s00181-016-1216-z

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-016-1216-z

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().