Journal of Productivity Analysis

, Volume 48, Issue 2–3, pp 117–132 | Cite as

A new method to decompose profit efficiency: an application to US commercial banks

Article

Abstract

We propose a new method to estimate profit efficiency which makes explicit how revenue and cost efficiencies contribute to overall profit efficiency. Using data from US commercial banks from 2001 to 2010, we find that losses due to profit inefficiency represent about 3.5% of banks’ equity of which 1% is due to revenue inefficiency and 2.4% to cost inefficiency. Revenue efficiency changes affect more overall profit efficiency than equivalent cost efficiency changes. In contrast to previous studies, but in line with economic intuition, we find that while revenue and cost efficiencies tend to be negatively correlated, both correlate positively with profit efficiency.

Keywords

Banking Profit efficiency Revenue efficiency Cost efficiency Nonstandard profit function Stochastic frontier 

JEL Classification

D24 G21 L13 

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Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.EAFIT University, Carrera 49 #7 Sur 50MedellínColombia
  2. 2.Binghamton University, 4400 Vestal Pkwy EBinghamtonUSA
  3. 3.University of Stavanger Business SchoolStavangerNorway

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