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An examination on the cost efficiency of the banking industry under multiple output prices' uncertainty

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  • Tai-Hsin Huang
  • Ying-Ting Liao
  • Li-Chih Chiang

Abstract

This article formulates a behavioural model of profit maximization, which explicitly incorporates both multiple output prices' risk and safety-first practice. This theoretical model is specifically suitable for investigating financial institutions, whose output prices frequently encounter a variety of risks, such as loan defaults/arrears. The sample banks are empirically found to be highly risk-averse. Furthermore, risk preferences exert little effect on the technical efficiency estimates, whereas the same estimates obtained by the standard fixed-effect model under certainty tend to be overestimated. Evidence is found that a specialized bank offering a single product with a larger scale of production will be preferable in an uncertain atmosphere.

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  • Tai-Hsin Huang & Ying-Ting Liao & Li-Chih Chiang, 2010. "An examination on the cost efficiency of the banking industry under multiple output prices' uncertainty," Applied Economics, Taylor & Francis Journals, vol. 42(9), pages 1169-1182.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:9:p:1169-1182
    DOI: 10.1080/00036840701721190
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