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Conference Paper
Reconsidering the degree of inefficiency of financial institutions
There is an extensive existing literature on the cost efficiency of banking institutions that estimates cost inefficiencies of the order of 15 to 30%. The persistence of such staggering inefficiencies is surprising given the competitive nature of the industry. Using a novel estimation framework that complements traditional cost function estimation with a revenue analysis, we find that much of what the prior literature classified as inefficiency is actually productive expenditure. This expenditure effectively increases the quality of the banking institution?s products and results in higher ...