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Jalal D. Akhavein - One of the best experts on this subject based on the ideXlab platform.

  • The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function
    Review of Industrial Organization, 1997
    Co-Authors: Jalal D. Akhavein, Allen N. Berger, David B. Humphrey
    Abstract:

    This paper examines the efficiency and price effects of mergers by applying a frontier Profit Function to data on bank ‘megamergers’. We find that merged banks experience a statistically significant 16 percentage point average increase in Profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on Profits from merger-related changes in prices were found to be very small.

  • A General Method of Deriving the Inefficiencies of Banks from a Profit Function
    Journal of Productivity Analysis, 1997
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman, Rao Singamsetti
    Abstract:

    This article develops a new method of estimating inefficiencies in joint production and shows that unlike the approaches utilized in the previous studies of inefficiency, this method maintains a consistent relationship between the error term of a Profit Function and the error terms of its price derivatives. A useful by-product of the method is a proof of a Hotelling-like lemma that relates stochastic input demand and output supply Functions to stochastic Profit Functions. While the previous studies fit a single frontier to data on all firms, this paper estimates a frontier unique to every observed firm to allow each one to have a different potential of achieving maximal levels of Profit. The new method is applied in the analysis of annual data, 1984–1989, for U.S. commercial banks. Both the analytical and numerical results of the paper show that the residual that the previous studies attribute to inefficiency includes the effects of excluded variables and of inaccuracies in the specified Functional forms. Once accurate estimates of these effects are subtracted from the residual, the distortions in the measured inefficiencies should be considerably reduced. Consequently, this article considers how such estimates might be obtained.

  • the effects of megamergers on efficiency and prices evidence from a bank Profit Function
    Research Papers in Economics, 1996
    Co-Authors: Allen N. Berger, Jalal D. Akhavein, David B. Humphrey
    Abstract:

    The recent waves of large mergers and acquisitions in both manufacturing and service industries in the United States raise important questions concerning the public policy tradeoffs between possible gains in operating efficiency versus possible social efficiency losses from a greater exercise of market power. The answers largely depend upon the source of increased operating Profits (if nay) from consolidation. Mergers and acquisitions could raise Profits in any of three major ways. First, they could improve cost efficiency, reducing costs per unit of output for a given set of output quantities and input prices. Consultants and mangers have often justified large mergers on the basis of expected cost efficiency gains. Second, mergers may increase Profits through improvements in Profit efficiency that involve superior combinations of inputs and outputs. Profit efficiency is a more inclusive concept than cost efficiency, because it takes into account the cost and revenue effects of the choice of the output vector, which is taken as given in the measurement of cost efficiency. Thus, a merger could improve Profit efficiency without improving cost efficiency if the reconfiguration of outputs associated with the merger increases revenues more than it increases costs, or if it reduces costs more than it reduces revenues. The authors argue that analysis of Profit efficiency is moe appropriate for the evaluation of mergers than cost efficiency because outputs typically do change substantially subsequent to a merger. Third, mergers may improve Profits through the exercise of additional market power in setting prices. An increase in market concentration or market share may allow the consolidated firm to charge higher rates for the good or services it products, raising Profits by extracting more surplus from consumers, with any improvement in efficiency. The authors believe that the academic literature has made little progress in determining the sources of Profitability gains, if any, associated with bank mergers. Of the three main sources of potential Profitability gains, the literature has focused primarily on cost efficiency improvements. The empirical evidence suggests that mergers have had very little effect on cost efficiency on average. Moreover, there has also been little progress in divining any ex ante conditions that accurately predict the changes in cost efficiency that do occur for possible use in antitrust policy. Similarly, there are very few academic studies of which the authors are aware of the changes in prices associated with bank mergers. This is surprising, given that a major thrust of current antitrust enforcement is to prevent mergers which are expected to result in prices less favorable to consumers or to require divestitures that accomplish this goal. The authors findings suggest that the banking megamergers of the 1980s did significantly improve Profit efficiency on average. The average Profit efficiency rank of merging banks increased from the 74th percentile to the 90th percentile of the peer group of large banks with complete data available over the same time intervals, a statistically significant 16 percentage point increase. Use of Profit efficiency levels, rather than ranks, indicated similar improvements. This main result also was robust to the alternative 'nonstandard' specification of the Profit Function which likely removes any scale or merger biases from the analysis. The authors suggest that the reason for the different findings is quite simple. Measured cost efficiency changes do not take into account the effects of the changes in output that occur after the merger, whereas measured Profit efficiency changes include all the cost efficiency changes plays the cost and revenue effects of changes in output that typically occur after a merger. The authors suggest that their results may not necessarily generalize to mergers other than the banking megamergers of the 1980s that make up the data set. It is possible that greater cost efficiency gains maybe present in other industries or in bank mergers of the 1990s because of an increased focus on cost savings in the current decade. Similarly, there may be more market power effects on prices in mergers of smaller banks, which tend to occur in more concentrated local markets.

  • A general method of deriving the efficiencies of banks from a Profit Function
    1994
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman
    Abstract:

    Questions of whether the evolution of the financial services industry results in more efficient intermediaries, better prices and service quality for consumers, and greater bank safety and soundness cannot be answered without addressing the cost and revenue efficiencies of the industry. Most studies of the efficiency of financial institutions have used an econometric approach to measure efficiency. This paper tries to address potential econometric problems of previous efficiency studies and suggests a new technique for measuring efficiency. This method is applied to data on U.S. commercial banks from 1984 through 1989. Previous studies used one of four different approaches for estimating X-efficiencies - the econometric frontier approach, the thick frontier approach, data envelopment analysis, and the distribution free approaches. In all four cases, the econometric problem of estimating X-efficiencies is defined simply as one of distinguishing between two components of a random error term added to a cost or Profit Function. The authors suggest that it is possible that the actual econometric problem of estimating X-inefficiencies is not as simple as the problem of distinguishing between two random components because of the following three reasons: ( i ) the true Functional forms of the cost or Profit Functions of the firms are usually unknown; ( ii ) explanatory variables excluded from the cost or Profit Function are likely to be correlated with the explanatory variables included in the Function; and (iii) inconsistencies may arise if arbitrary error terms are added to a cost or Profit Function and their corresponding share equations. The authors use a fixed-coefficients model that allows them to address the econometric problems mentioned above. This methodology also allows for the estimation of a separate frontier for each firm as opposed to previous studies that estimate one frontier which is common to all firms. The results of the paper show that the residual which the previous studies attributed to technical inefficiency potentially included the effects of excluded variables, of inaccuracies in the specified Functional forms, and of inconsistent parameter estimates. They further show that once these effects are subtracted from the residual, the measured inefficiencies are substantially reduced. The results do support some of the previous studies' conclusions - in general measured technical inefficiencies dominate allocative inefficiencies and that on average large banks are more efficient from both the technical and allocative perspectives than small and medium sized banks.

  • A general method of deriving the efficiencies of banks from a Profit Function
    Social Science Research Network, 1994
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman
    Abstract:

    Questions of whether the evolution of the financial services industry results in more efficient intermediaries, better prices and service quality for consumers, and greater bank safety and soundness cannot be answered without addressing the cost and revenue efficiencies of the industry. Most studies of the efficiency of financial institutions have used an econometric approach to measure efficiency. This paper tries to address potential econometric problems of previous efficiency studies and suggests a new technique for measuring efficiency. This method is applied to data on U.S. commercial banks from 1984 through 1989. Previous studies used one of four different approaches for estimating X-efficiencies - the econometric frontier approach, the thick frontier approach, data envelopment analysis, and the distribution free approaches. In all four cases, the econometric problem of estimating X-efficiencies is defined simply as one of distinguishing between two components of a random error term added to a cost or Profit Function. The authors suggest that it is possible that the actual econometric problem of estimating X-inefficiencies is not as simple as the problem of distinguishing between two random components because of the following three reasons: ( i ) the true Functional forms of the cost or Profit Functions of the firms are usually unknown; ( ii ) explanatory variables excluded from the cost or Profit Function are likely to be correlated with the explanatory variables included in the Function; and (iii) inconsistencies may arise if arbitrary error terms are added to a cost or Profit Function and their corresponding share equations. The authors use a fixed-coefficients model that allows them to address the econometric problems mentioned above. This methodology also allows for the estimation of a separate frontier for each firm as opposed to previous studies that estimate one frontier which is common to all firms. The results of the paper show that the residual whic (This abstract was borrowed from another version of this item.)

David B. Humphrey - One of the best experts on this subject based on the ideXlab platform.

  • The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function
    Review of Industrial Organization, 1997
    Co-Authors: Jalal D. Akhavein, Allen N. Berger, David B. Humphrey
    Abstract:

    This paper examines the efficiency and price effects of mergers by applying a frontier Profit Function to data on bank ‘megamergers’. We find that merged banks experience a statistically significant 16 percentage point average increase in Profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on Profits from merger-related changes in prices were found to be very small.

  • the effects of megamergers on efficiency and prices evidence from a bank Profit Function
    Research Papers in Economics, 1996
    Co-Authors: Allen N. Berger, Jalal D. Akhavein, David B. Humphrey
    Abstract:

    The recent waves of large mergers and acquisitions in both manufacturing and service industries in the United States raise important questions concerning the public policy tradeoffs between possible gains in operating efficiency versus possible social efficiency losses from a greater exercise of market power. The answers largely depend upon the source of increased operating Profits (if nay) from consolidation. Mergers and acquisitions could raise Profits in any of three major ways. First, they could improve cost efficiency, reducing costs per unit of output for a given set of output quantities and input prices. Consultants and mangers have often justified large mergers on the basis of expected cost efficiency gains. Second, mergers may increase Profits through improvements in Profit efficiency that involve superior combinations of inputs and outputs. Profit efficiency is a more inclusive concept than cost efficiency, because it takes into account the cost and revenue effects of the choice of the output vector, which is taken as given in the measurement of cost efficiency. Thus, a merger could improve Profit efficiency without improving cost efficiency if the reconfiguration of outputs associated with the merger increases revenues more than it increases costs, or if it reduces costs more than it reduces revenues. The authors argue that analysis of Profit efficiency is moe appropriate for the evaluation of mergers than cost efficiency because outputs typically do change substantially subsequent to a merger. Third, mergers may improve Profits through the exercise of additional market power in setting prices. An increase in market concentration or market share may allow the consolidated firm to charge higher rates for the good or services it products, raising Profits by extracting more surplus from consumers, with any improvement in efficiency. The authors believe that the academic literature has made little progress in determining the sources of Profitability gains, if any, associated with bank mergers. Of the three main sources of potential Profitability gains, the literature has focused primarily on cost efficiency improvements. The empirical evidence suggests that mergers have had very little effect on cost efficiency on average. Moreover, there has also been little progress in divining any ex ante conditions that accurately predict the changes in cost efficiency that do occur for possible use in antitrust policy. Similarly, there are very few academic studies of which the authors are aware of the changes in prices associated with bank mergers. This is surprising, given that a major thrust of current antitrust enforcement is to prevent mergers which are expected to result in prices less favorable to consumers or to require divestitures that accomplish this goal. The authors findings suggest that the banking megamergers of the 1980s did significantly improve Profit efficiency on average. The average Profit efficiency rank of merging banks increased from the 74th percentile to the 90th percentile of the peer group of large banks with complete data available over the same time intervals, a statistically significant 16 percentage point increase. Use of Profit efficiency levels, rather than ranks, indicated similar improvements. This main result also was robust to the alternative 'nonstandard' specification of the Profit Function which likely removes any scale or merger biases from the analysis. The authors suggest that the reason for the different findings is quite simple. Measured cost efficiency changes do not take into account the effects of the changes in output that occur after the merger, whereas measured Profit efficiency changes include all the cost efficiency changes plays the cost and revenue effects of changes in output that typically occur after a merger. The authors suggest that their results may not necessarily generalize to mergers other than the banking megamergers of the 1980s that make up the data set. It is possible that greater cost efficiency gains maybe present in other industries or in bank mergers of the 1990s because of an increased focus on cost savings in the current decade. Similarly, there may be more market power effects on prices in mergers of smaller banks, which tend to occur in more concentrated local markets.

  • Bank efficiency derived from the Profit Function
    Journal of Banking & Finance, 1993
    Co-Authors: Allen N. Berger, Diana Hancock, David B. Humphrey
    Abstract:

    Abstract Both input and output inefficiencies are derived from a Profit Function for US banks. These inefficiencies are decomposed into allocative and technical components in a new way using shadow prices. About half of all potential variable Profits are estimated to be lost to inefficiency. Most inefficiencies are from deficient output revenues, rather than excessive input costs. Larger banks are found to be more efficient than smaller banks, which may offset scale diseconomies found elsewhere. Tests of a new concept, ‘optimal scope economies’, suggest that joint production is optimal for most banks, but that specialization is optimal for others.

Robert Sproule - One of the best experts on this subject based on the ideXlab platform.

Subal C. Kumbhakar - One of the best experts on this subject based on the ideXlab platform.

  • A dynamic Profit Function with adjustment costs for outputs
    Empirical Economics, 2007
    Co-Authors: Frank Asche, Subal C. Kumbhakar, Ragnar Tveterås
    Abstract:

    It is well known that there are adjustment costs associated with many input factors, which delays firms response to changes in relative prices. Although adjustment costs are implicitly acknowledged when a cost rather than Profit Function is used, little attention has been given to adjustment costs for outputs. However, in many cases there will also be adjustment costs associated with changes in the product mix for multioutput firms. In this paper we formulate a firm’s optimization problem in a Profit maximizing set up that allows adjustment costs for all netputs from which it follows that adjustment cost for some factors affect the adjustment of both inputs and outputs. We also show that one can test whether a factor is quasi-fixed or fully fixed.

  • Testing cost vs. Profit Function
    Applied Economics Letters, 2007
    Co-Authors: Frank Asche, Subal C. Kumbhakar, Ragnar Tveterås
    Abstract:

    The empirical literature on estimation of production technology mostly focuses on estimation of dual cost Functions. Estimation of a Profit Function is not that common. Here, we formally test whether the production technology should be represented by a cost or Profit Function. We also derive elasticities associated with the long-run Profit Function from the estimated cost Function.

  • Productivity measurement: a Profit Function approach
    Applied Economics Letters, 2002
    Co-Authors: Subal C. Kumbhakar
    Abstract:

    This article provides an analytical framework to measure and decompose total factor productivity growth into technical change and economies of scale, using a Profit Function approach. Both single and multiple output cases are considered.

  • A Parametric Approach to Efficiency Measurement Using a Flexible Profit Function
    Southern Economic Journal, 1996
    Co-Authors: Subal C. Kumbhakar
    Abstract:

    Although the idea of measuring productive efficiency goes back to Farrell [8], the econometric estimation of it began with Aigner, Lovell, and Schmidt [1] and Meeusen and van den Broeck [17]. In Aigner, Lovell, and Schmidt [1] and Meeusen and van den Broeck [17], and their extensions which incorporate either cost minimizing or Profit maximizing behavior, efficiency is measured relative to a frontier. An alternative to the frontier approach that started with Hopper [10] and Lau and Yotopoulos [15], is to measure efficiency (mostly allocative) without estimating any frontier. In the latter approach, allocative inefficiency (defined as the deviations of the first order conditions of Profit maximization or cost minimization) is modeled through shadow (virtual) prices which are parametric Functions of observed prices. The shadow price approach is extensively used in the literature on efficiency measurement because it has an advantage over the frontier approach, which requires distributional assumptions on the error terms-especially in cross sectional models. In empirical studies on the efficiency of regulated utilities, it has been argued that due to the presence of rate of return and other regulations, these firms optimize with respect to shadow prices instead of observed prices. These studies often fail to consider the possibility that the firms under question may be technically inefficient as well, which can affect allocation of inputs.1 This issue is important in both cost minimization and Profit maximization cases. This paper uses a Profit maximization framework and develops a generalized Profit Function approach that accommodates both technical and allocative inefficiencies in the context of a panel data model. The relationship between production technical inefficiency (loss of output due to technical inefficiency) and Profit technical inefficiency (Profit loss due to technical inefficiency) is derived for a flexible production Function. Presently, it is believed that the derivation of this relationship is only possible for the self-dual production Functions. We show that if the Profit Function is translog, some popular approaches used in modeling technical and allocative inefficiency are incorrect. In particular, we show that: (i) models that fail to include technical inefficiency and consider only allocative inefficiency yield biased and inconsistent parameter estimates; (ii) if technical inefficiency is neglected, the measure of technical change will be biased. The generalized Profit Function developed here is capable of distinguishing between technical change and time-varying technical inefficiency. Such a distinction is not possible if, for example, one uses

  • Price Distortions and Resource-Use Efficiency in Indian Agriculture: A Restricted Profit Function Approach
    The Review of Economics and Statistics, 1992
    Co-Authors: Subal C. Kumbhakar, Arunava Bhattacharyya
    Abstract:

    This paper develops a generalized Profit Function that incorporates price distortions resulting from imperfect market conditions, sociopolitical and institutional constraints, as well as technical and allocative inefficiency. The model is applied to test (1) the appropriateness of the neoclassical Profit Function and (2) the effect of education and farm size on allocative performance using farm-level data from Indian agriculture. Empirical results reject the neoclassical Profit-maximization hypothesis based on market prices in favor of the general model with price distortions and, therefore, help to improve allocation of inputs and output. Farm size is found to reduce price distortions only for small farmers. Copyright 1992 by MIT Press.

Stephen B. Taubman - One of the best experts on this subject based on the ideXlab platform.

  • A General Method of Deriving the Inefficiencies of Banks from a Profit Function
    Journal of Productivity Analysis, 1997
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman, Rao Singamsetti
    Abstract:

    This article develops a new method of estimating inefficiencies in joint production and shows that unlike the approaches utilized in the previous studies of inefficiency, this method maintains a consistent relationship between the error term of a Profit Function and the error terms of its price derivatives. A useful by-product of the method is a proof of a Hotelling-like lemma that relates stochastic input demand and output supply Functions to stochastic Profit Functions. While the previous studies fit a single frontier to data on all firms, this paper estimates a frontier unique to every observed firm to allow each one to have a different potential of achieving maximal levels of Profit. The new method is applied in the analysis of annual data, 1984–1989, for U.S. commercial banks. Both the analytical and numerical results of the paper show that the residual that the previous studies attribute to inefficiency includes the effects of excluded variables and of inaccuracies in the specified Functional forms. Once accurate estimates of these effects are subtracted from the residual, the distortions in the measured inefficiencies should be considerably reduced. Consequently, this article considers how such estimates might be obtained.

  • A general method of deriving the efficiencies of banks from a Profit Function
    1994
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman
    Abstract:

    Questions of whether the evolution of the financial services industry results in more efficient intermediaries, better prices and service quality for consumers, and greater bank safety and soundness cannot be answered without addressing the cost and revenue efficiencies of the industry. Most studies of the efficiency of financial institutions have used an econometric approach to measure efficiency. This paper tries to address potential econometric problems of previous efficiency studies and suggests a new technique for measuring efficiency. This method is applied to data on U.S. commercial banks from 1984 through 1989. Previous studies used one of four different approaches for estimating X-efficiencies - the econometric frontier approach, the thick frontier approach, data envelopment analysis, and the distribution free approaches. In all four cases, the econometric problem of estimating X-efficiencies is defined simply as one of distinguishing between two components of a random error term added to a cost or Profit Function. The authors suggest that it is possible that the actual econometric problem of estimating X-inefficiencies is not as simple as the problem of distinguishing between two random components because of the following three reasons: ( i ) the true Functional forms of the cost or Profit Functions of the firms are usually unknown; ( ii ) explanatory variables excluded from the cost or Profit Function are likely to be correlated with the explanatory variables included in the Function; and (iii) inconsistencies may arise if arbitrary error terms are added to a cost or Profit Function and their corresponding share equations. The authors use a fixed-coefficients model that allows them to address the econometric problems mentioned above. This methodology also allows for the estimation of a separate frontier for each firm as opposed to previous studies that estimate one frontier which is common to all firms. The results of the paper show that the residual which the previous studies attributed to technical inefficiency potentially included the effects of excluded variables, of inaccuracies in the specified Functional forms, and of inconsistent parameter estimates. They further show that once these effects are subtracted from the residual, the measured inefficiencies are substantially reduced. The results do support some of the previous studies' conclusions - in general measured technical inefficiencies dominate allocative inefficiencies and that on average large banks are more efficient from both the technical and allocative perspectives than small and medium sized banks.

  • A general method of deriving the efficiencies of banks from a Profit Function
    Social Science Research Network, 1994
    Co-Authors: Jalal D. Akhavein, P. A. V. B. Swamy, Stephen B. Taubman
    Abstract:

    Questions of whether the evolution of the financial services industry results in more efficient intermediaries, better prices and service quality for consumers, and greater bank safety and soundness cannot be answered without addressing the cost and revenue efficiencies of the industry. Most studies of the efficiency of financial institutions have used an econometric approach to measure efficiency. This paper tries to address potential econometric problems of previous efficiency studies and suggests a new technique for measuring efficiency. This method is applied to data on U.S. commercial banks from 1984 through 1989. Previous studies used one of four different approaches for estimating X-efficiencies - the econometric frontier approach, the thick frontier approach, data envelopment analysis, and the distribution free approaches. In all four cases, the econometric problem of estimating X-efficiencies is defined simply as one of distinguishing between two components of a random error term added to a cost or Profit Function. The authors suggest that it is possible that the actual econometric problem of estimating X-inefficiencies is not as simple as the problem of distinguishing between two random components because of the following three reasons: ( i ) the true Functional forms of the cost or Profit Functions of the firms are usually unknown; ( ii ) explanatory variables excluded from the cost or Profit Function are likely to be correlated with the explanatory variables included in the Function; and (iii) inconsistencies may arise if arbitrary error terms are added to a cost or Profit Function and their corresponding share equations. The authors use a fixed-coefficients model that allows them to address the econometric problems mentioned above. This methodology also allows for the estimation of a separate frontier for each firm as opposed to previous studies that estimate one frontier which is common to all firms. The results of the paper show that the residual whic (This abstract was borrowed from another version of this item.)