Threshold effects of financial status on the cost frontiers of financial institutions in nondynamic panels

Mei-Hui Wang and Tai-Hsin Huang

Applied Economics, 2009, vol. 41, issue 26, 3389-3401

Abstract: This article applies Hansen's (1999, 2000) threshold regression model to estimate translog cost frontiers in the hope of shedding light on the banking industry's production processes and the extent of its Technical Efficiency (TE). The threshold technique allows for the existence of multiple technologies of production, distinguished by an exogenous threshold variable. Strong evidence of multiple technologies is found in the industry irrespective of which financial indicator, as constructed by factor analysis, defines the threshold variable. Cost savings and scale economies among the various underlying technologies are compared herein. We also highlight the differences between the threshold results and the conventional cost frontier.

Date: 2009
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DOI: 10.1080/00036840802600079

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