Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
We present and estimate a model that shifts the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing technologies. We implement the model using the almost ideal demand system. In addition, we use the model to measure efficiency in a more general way that can incorporate a concern for the market value of firms’ assets and equity and identify value-maximizing firms. This shift in focus bridges the gap between the risk incentives literature in banking that ignores the microeconomics of production and the production literature that ignores the relationship between production decisions and risk. Our estimation of the model for a sample of U.S. commercial banks illustrates that results obtained from our generalized model can differ significantly from those obtained from the standard profit-maximization model, which ignores risk.
Berger, Allen N. and Loretta J. Mester. “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?” Journal of Banking and Finance 21 (1997), 895-947.
Calomiris, Charles W. and Charles M. Kahn. “The Role of Demandable Debt in Structuring Optimal Banking Arrangements.” American Economic Review 81 (1991), 497-513.
Deaton, Angus and John Muellbauer. “An Almost Ideal Demand System.” American Economic Review 70 (1980), 312-326.
Demsetz, Rebecca S., Marc R. Saidenberg, and Philip E. Strahan. “Banks with Something to Lose: The Disciplinary Role of Franchise Value.” Federal Reserve Bank of New York, Economic Policy Review 2 (1996), 1-14.
DeYoung, Robert, Joseph P. Hughes, and Choon-Geol Moon. “Efficient Risk-Taking and Regulatory Covenant Enforcement in a Deregulated Banking Industry.” Journal of Economics and Business (forthcoming).
Flannery, Mark J. “Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms.” American Economic Review 84 (1994), 320-331.
Gorton, Gary and Richard Rosen. “Corporate Control, Portfolio Choice, and the Decline of Banking.” Journal of Finance 50 (1995), 1377-1420.
Grossman, Richard S. “Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930's.” American Economic Review 82 (1992), 800-821.
Hughes, Joseph P. Hospital Cost Functions: The Case Where Revenues Affect Production. Working Paper No. 1990-01, Rutgers University, Department of Economics (November 1989).
Hughes, Joseph P. The Theory and Estimation of Revenue-Driven Costs: The Case of Higher Education. Unpublished manuscript, Rutgers University, Department of Economics, February 1990.
Hughes, Joseph P. “Incorporating Risk into the Analysis of Production.” Atlantic Economic Journal 27 (1999), 1-23.
Hughes, Joseph P., William Lang, Loretta J. Mester, and Choon-Geol Moon. Recovering Technologies That Account for Generalized Managerial Preferences: An Application to Non-Risk-Neutral Banks. Whart on Financial Institutions Center, Working Paper 95-16, and Federal Reserve Bank of Philadelphia Working Paper No. 95-8/R, 1995.
Hughes, Joseph P., William Lang, Loretta J. Mester, and Choon-Geol Moon. “Efficient Banking Under Interstate Branching.” Journal of Money, Credit, and Banking 28 (1996), 1045-1071.
Hughes, Joseph P., William Lang, Loretta Mester, and Choon-Geol Moon. “The Dollars and Sense of Bank Consolidation.” Journal of Banking and Finance 23 (1999), 291-324.
Hughes, Joseph P., William Lang, Choon-Geol Moon, and Michael Pagano. Measuring the Efficiency of Capital Allocation in Commercial Banking. Federal Reserve Bank of Philadelphia, Working Paper 98-2, 1997, revised 1999.
Hughes, Joseph P. and Loretta J. Mester. “A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the ‘Too-Big-to-Fail’ Doctrine.” Journal of Productivity Analysis 4 (1993), 292-315.
Hughes, Joseph P., Loretta J. Mester, and Choon-Geol Moon. Are Scale Economies in Banking Elusive or Illusive? Evidence Obtained by Incorporating Capital Structure and Risk-Taking into Models of Bank Production. Working Paper 00-04, Federal Reserve Bank of Philadelphia, May 2000.
Hughes, Joseph P. and Choon-Geol Moon. Measuring Bank Efficiency When Managers Trade Return for Reduced Risk. Working Paper, Rutgers University, Department of Economics, 1995.
Humphrey, D.B. and L.B. Pulley. “Banks' Responses to Deregulation: Profits, Technology, and Efficiency.” Journal of Money, Credit, and Banking 29 (1997), 73-93.
Keeley, Michael C. “Deposit Insurance, Risk, and Market Power in Banking.” American Economic Review 80 (1990), 1183-1200.
Marcus, Alan J. “Deregulation and Bank Financial Policy.” Journal of Banking and Finance 8 (1984), 557-565.
Merton, Robert C. “An Analytic Derivation of the Cost of Deposit Insurance Loan Guarantees.” Journal of Banking and Finance 1 (1977), 3-11.
Modigliani, F. and M.H. Miller. “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review 48 (1958), 261-297.
Saunders, Anthony, E. Strock, and N.G. Travlos. “Ownership Structure, Deregulation, and Bank-Risk-Taking.” Journal of Finance 45 (1990), 643-654.
Tufano, Peter. “Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry.” Journal of Finance 50 (1996), 1097-1137.
van Wissen, Leo and Thomas F. Golob. “A Dynamic Model of Car Fuel-Type Choice and Mobility.” Transportation Research 26B (1992), 77-96.
- Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking
Journal of Financial Services Research
Volume 18, Issue 1 , pp 5-27
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- agency problems.
- Industry Sectors
- Author Affiliations
- 1. Rutgers University, USA
- 2. Office of the Comptroller of the Currency, USA
- 3. Federal Reserve Bank of Philadelphia and The Wharton School, University of Pennsylvania, USA
- 4. College of Business and Economics, Hanyang University, USA