New Estimates of the Lerner Index of Market Power for U.S. Banks

David Wheelock and Paul Wilson

No 2019-012, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for inefficiency and off-balance-sheet output.

Keywords: Lerner index; banks; market power; nonparametric regressions (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 G21 L13 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2019-04-16, Revised 2020-02-19
New Economics Papers: this item is included in nep-acc, nep-com and nep-eff
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Citations: View citations in EconPapers (2)

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DOI: 10.20955/wp.2019.012

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