Working Paper Revision

New Estimates of the Lerner Index of Market Power for U.S. Banks

Abstract: The Lerner index is widely used to assess firms' market power. However, estimation and interpretation present several challenges, especially for banks, which tend to produce multiple outputs and operate with considerable inefficiency. We estimate Lerner indices for U.S. banks for 2001-18 using nonparametric estimators of the underlying cost and profit functions, controlling for inefficiency, and incorporating banks' off-balance-sheet activities. We find that mis-specification of cost or profit functional forms can seriously bias Lerner index estimates, as can failure to account for inefficiency and off-balance-sheet output.

Keywords: Lerner index; banks; market power; nonparametric regressions;

JEL Classification: C12; C13; C14; G21; L13;

Access Documents

File(s): File format is application/pdf
Description: Full text


Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-02-19

Number: 2019-012

Related Works