Technical and allocative efficiency in European banking

This paper specifies an empirical framework for estimating both technical and allocative efficiency using the translog cost-share system, thus providing a solution to the issue known in the literature as the Greene problem. The model is applied to a large panel of European banks and the results are...

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Bibliographic Details
Published in:European journal of operational research 2010-07, Vol.204 (1), p.153-163
Main Authors: Brissimis, Sophocles N., Delis, Manthos D., Tsionas, Efthymios G.
Format: Article
Language:English
Subjects:
Applied sciences
Banking industry
Bayesian analysis
Efficiency
Estimating techniques
European banking
Exact sciences and technology
Firm modelling
Maximum likelihood
Operational research and scientific management
Operational research. Management science
Parameter estimation
Studies
Technical and allocative efficiency
Technical and allocative efficiency Translog cost function Maximum likelihood European banking
Translog cost function
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Summary:This paper specifies an empirical framework for estimating both technical and allocative efficiency using the translog cost-share system, thus providing a solution to the issue known in the literature as the Greene problem. The model is applied to a large panel of European banks and the results are compared with those of a model that does not include an allocative inefficiency term and also with those obtained by using a consistent Bayesian technique. Our results suggest that models which include only technical efficiency, significantly overestimate it, while parameter estimates from the model that includes both technical and allocative efficiency are very close to the ones obtained from the Bayesian approach, thus enhancing our confidence in the proposed methodology. Finally, the fact that allocative efficiency of banks in our sample improves more than technical efficiency underlines the importance of including an allocative inefficiency component in parametric efficiency models.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2009.09.034