Working Paper
Nonparametric Estimation of Lerner Indices for U.S. Banks Allowing for Inefficiency and Off-Balance Sheet Activities
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;
https://doi.org/10.20955/wp.2019.012
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2019-11-21
Number: 2019-12
Pages: 74 pages
Related Works
- Working Paper Revision (2020-02-19) : New Estimates of the Lerner Index of Market Power for U.S. Banks
- Working Paper Original (2019-11-21) : You are here.