Abstract
In this paper we analyse bank efficiency in Germany for four cross-sections of data
during the period 1995-2001. Under the assumption of cost minimisation we obtain
firm-specific efficiency estimates using stochastic frontier analysis. To explicitly allow
for different risk preferences when measuring efficiency we then develop a model
based on utility maximisation. Using the almost ideal demand system, input- and
profit demand functions are estimated and risk-preferences recovered. Efficiency is
then measured in the risk-return space. Efficiency scores improve substantially and
the dispersion of performance across sectors and size classes vanishes. Rank-order
correlation between the two measures is low or insignificant. This suggests that
best-practice institutes should not be identified only on the basis of cost efficiency.
However, in terms of magnitude risk-return efficiency seems to be of less
importance than cost efficiency.
during the period 1995-2001. Under the assumption of cost minimisation we obtain
firm-specific efficiency estimates using stochastic frontier analysis. To explicitly allow
for different risk preferences when measuring efficiency we then develop a model
based on utility maximisation. Using the almost ideal demand system, input- and
profit demand functions are estimated and risk-preferences recovered. Efficiency is
then measured in the risk-return space. Efficiency scores improve substantially and
the dispersion of performance across sectors and size classes vanishes. Rank-order
correlation between the two measures is low or insignificant. This suggests that
best-practice institutes should not be identified only on the basis of cost efficiency.
However, in terms of magnitude risk-return efficiency seems to be of less
importance than cost efficiency.
| Original language | English |
|---|---|
| Place of Publication | Utrecht |
| Publisher | UU USE Tjalling C. Koopmans Research Institute |
| Number of pages | 58 |
| Publication status | Published - 2004 |
Publication series
| Name | Discussion Paper Series / Tjalling C. Koopmans Research Institute |
|---|---|
| No. | 08 |
| Volume | 04 |
| ISSN (Electronic) | 2666-8238 |