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Title of Journal: Empir Econ

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Abbravation: Empirical Economics

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Springer Berlin Heidelberg

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DOI

10.1007/s10509-011-0670-5

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1435-8921

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Joint estimation of the Lerner index and cost effi

Authors: TaiHsin Huang NanHung Liu Subal C Kumbhakar
Publish Date: 2017/01/04
Volume: 54, Issue: 2, Pages: 799-822
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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 twostep approach the SF approach used herein estimates a bankspecific 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”

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