An examination on the cost efficiency of the banking industry under multiple output prices' uncertainty

Tai-Hsin Huang, Ying-Ting Liao and Li-Chih Chiang

Applied Economics, 2010, vol. 42, issue 9, 1169-1182

Abstract: This article formulates a behavioural model of profit maximization, which explicitly incorporates both multiple output prices' risk and safety-first practice. This theoretical model is specifically suitable for investigating financial institutions, whose output prices frequently encounter a variety of risks, such as loan defaults/arrears. The sample banks are empirically found to be highly risk-averse. Furthermore, risk preferences exert little effect on the technical efficiency estimates, whereas the same estimates obtained by the standard fixed-effect model under certainty tend to be overestimated. Evidence is found that a specialized bank offering a single product with a larger scale of production will be preferable in an uncertain atmosphere.

Date: 2010
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DOI: 10.1080/00036840701721190

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