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The Causal Linkages between Market Power and Cost Efficiency: Testing Quiet Life Hypothesis for the Banking Industry

Author

Listed:
  • Ayesha Hameed

    (Institute of Business Management, Karachi, Pakistan)

  • Tahir Saeed Jagirani

    (School of Economics, Finance and Banking, University Utara Malaysia (UUM), Malaysia)

  • Mohammad Qamar Qureshi

    (Anglia Ruskin University, United Kingdom)

  • Aisha Riaz

    (Department of Management Sciences, University of Okara, Okara, Pakistan)

Abstract

This study aims to test the quiet life hypothesis considering the impact of market power on cost efficiency in Pakistani banks where managers of the banking industry slacken their efforts to enjoy a ‘quiet life’ due to market power and are not focused on the cost efficiency of their banks. Thus, banks with high market power are relatively less focused on the efficient allocation of resources, resulting in a loss of consumer surplus and efficiency. We take panel data for a sample of 25 commercial banks throughout 2006-2019. Our findings suggest Uni-directional causality running from cost efficiency towards market power in the case of Pakistan. In addition, to control for endogeneity, we adopt a dynamic two-step system GMM approach to model the relationship between market power and cost efficiency. Our findings suggest significantly negative effects of cost efficiency over market power, disproving the presence of quiet life in the case of Pakistan. This study provides substantial theoretical contributions in the form of the Quiet life hypothesis and welfare performance of banks. However, to the best of our knowledge, the causal linkages and the effects of market power on cost efficiency or vice versa are not documented for the banking industry of Pakistan.

Suggested Citation

  • Ayesha Hameed & Tahir Saeed Jagirani & Mohammad Qamar Qureshi & Aisha Riaz, 2024. "The Causal Linkages between Market Power and Cost Efficiency: Testing Quiet Life Hypothesis for the Banking Industry," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(1), pages 803-811.
    • Handle: RePEc:rfh:bbejor:v:13:y:2024:i:1:p:803-811
    DOI: https://doi.org/10.61506/01.00272
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