Malikov, Emir and Kumbhakar, Subal C. and Tsionas, Efthymios (2015): A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of U.S. Banks in 20012010.

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Abstract
This paper offers a methodology to address the endogeneity of inputs in the directional technology distance function (DTDF) based formulation of banking technology which explicitly accommodates the presence of undesirable nonperforming loans  an inherent characteristic of the bank's production due to its exposure to credit risk. Specifically, we model nonperforming loans as an undesirable output in the bank's production process. Since the stochastic DTDF describing banking technology is likely to suffer from the endogeneity of inputs, we propose addressing this problem by considering a system consisting of the DTDF and the firstorder conditions from the bank's cost minimization problem. The firstorder conditions also allow us to identify the "costoptimal" directional vector for the banking DTDF, thus eliminating the uncertainty associated with an ad hoc choice of the direction. We apply our cost system approach to the data on large U.S. commercial banks for the 20012010 period, which we estimate via Bayesian MCMC methods subject to theoretical regularity conditions. We document dramatic distortions in banks' efficiency, productivity growth and scale elasticity estimates when the endogeneity of inputs is assumed away and/or the DTDF is fitted in an arbitrary direction.
Item Type:  MPRA Paper 

Original Title:  A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of U.S. Banks in 20012010 
Language:  English 
Keywords:  Bad Outputs, Commercial Banks, Directional Distance Function, Endogeneity, MCMC, Nonperforming Loans, Productivity, Technical Change 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C11  Bayesian Analysis: General C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C33  Panel Data Models ; Spatiotemporal Models D  Microeconomics > D2  Production and Organizations > D24  Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity G  Financial Economics > G2  Financial Institutions and Services > G21  Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages 
Item ID:  66490 
Depositing User:  Emir Malikov 
Date Deposited:  07. Sep 2015 16:50 
Last Modified:  07. Sep 2015 17:07 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/66490 