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Uncertainty and total factor productivity in the Taiwanese banking industry

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  • Cliff Huang
  • Tsu-Tan Fu

Abstract

In this article, we formulate a behavioural model under uncertainty to estimate Total Factor Productivity (TFP) in the Taiwan banking industry. In particular, the article provides a model based on the safety-first rule under uncertainty to measure the risk premium in banking operations that are subject to loan default and other investment risks. With panel data of 40 banks in 1981-1996, a translog cost function and the associated share equations are used to estimate the dual rate of Total Cost Diminution (TCD), the dual Returns To Scale (RTS) and the derived primal rate of TFP. A constant elasticity of transformation output function is employed to construct an aggregated output index of loan and investment activities. The empirical results indicate zero productivity growth and a highly risk-averse banking industry. Government-owned banks are generally more risk-averse than privately owned banks. As expected, the Taiwan banking industry became more risk-venturesome after the deregulation and liberalization of the industry and during the stock market boom of the late 1980s.

Suggested Citation

  • Cliff Huang & Tsu-Tan Fu, 2009. "Uncertainty and total factor productivity in the Taiwanese banking industry," Applied Financial Economics, Taylor & Francis Journals, vol. 19(9), pages 753-766.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:9:p:753-766
    DOI: 10.1080/09603100802167288
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    References listed on IDEAS

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    Cited by:

    1. Gerhardus Van Der Westhuizen, 2012. "Estimating Productivity Change in South African Banks: Decomposing Productity Index Numbers," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 13(2-1), pages 65-86, Winter-Su.
    2. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2013. "Dynamic relationships between industry returns and stock market returns," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 119-144.
    3. Rangkakulnuwat, Poomthan & Wang, H. Holly, 2011. "Productivity growth decomposition with FE-IV approach: Rethinking Thai commercial banks after the financial crisis," Economic Modelling, Elsevier, vol. 28(6), pages 2579-2588.
    4. Li-Hua Lai & Li-Chin Hung & Chau-Jung Kuo, 2016. "Do Well-Financial Holding Company Organized Banks in Taiwan Take More Risk?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-30, December.
    5. Appelbaum, E., 1989. "Uncertainty And The Measurement Of Productivity," Papers 89-05, York (Canada) - Department of Economics.

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