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Note: Ital numbers indicate that there is technological progress. Average profit technological progress for banks in Haiti

Table 7 Note: Ital numbers indicate that there is technological progress. Average profit technological progress for banks in Haiti

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For two outputs and three input prices, the translog form of the cost function is specified as follows.” The total cost of bank k is denoted Cy; yi, is the output 7 and py, is the price of the fe input of bank k in period ¢. For the profit frontier function, profit before tax, Pi, replaces the total cost, Cy. In addition, in the profit function the error term is the difference between vy, and uy, Vis — Ug, instead of their sum. Following Mester (1996), who first accounted for risk in efficiency measurement, I include equity (£;,) in the model to account for a bank’s risk-preferences. Berger and Mester (1997) underline that if financial capital is ignored, banks’ efficiency will be mismeasured. The model also includes a time trend (7) to account for technological progress that may affect the frontier functions (Altunbas and Chakravarty, 2001; Tadesse, 2006).
For two outputs and three input prices, the translog form of the cost function is specified as follows.” The total cost of bank k is denoted Cy; yi, is the output 7 and py, is the price of the fe input of bank k in period ¢. For the profit frontier function, profit before tax, Pi, replaces the total cost, Cy. In addition, in the profit function the error term is the difference between vy, and uy, Vis — Ug, instead of their sum. Following Mester (1996), who first accounted for risk in efficiency measurement, I include equity (£;,) in the model to account for a bank’s risk-preferences. Berger and Mester (1997) underline that if financial capital is ignored, banks’ efficiency will be mismeasured. The model also includes a time trend (7) to account for technological progress that may affect the frontier functions (Altunbas and Chakravarty, 2001; Tadesse, 2006).
To verify if scale economies exist, one needs to calculate the partial derivatives of cost and profit with respect to the outputs, following Jagtiani and Khanthavit (1996), Altunbas et al. (2001), Carvallo and Kasman (2005), and Margono et al. (2010). If the value of cost scale economies is less than one, there are increasing returns to scale (cost scale economies exist), and if this value is larger than one, there are decreasing returns to scale. A value equal to one indicates constant returns to scale. For profit scale economies, if the value is larger than one, there are increasing returns to scale (profit scale economies exist). If the value of profit scale economies is less than one, however, there are decreasing returns to scale. Again, a value equal to one indicates constant returns to scale. The measure of cost scale economies is calculated as follows:* A bank’s technological progress is also derived from the frontier functions. It is measured by the partial derivative of cost with respect to the time trend. When it comes to the profit frontier function, technological progress is measured by the formulation of the partial derivative of profit with respect to the time trend measures. Thus, technological progress is calculated as follows:°
To verify if scale economies exist, one needs to calculate the partial derivatives of cost and profit with respect to the outputs, following Jagtiani and Khanthavit (1996), Altunbas et al. (2001), Carvallo and Kasman (2005), and Margono et al. (2010). If the value of cost scale economies is less than one, there are increasing returns to scale (cost scale economies exist), and if this value is larger than one, there are decreasing returns to scale. A value equal to one indicates constant returns to scale. For profit scale economies, if the value is larger than one, there are increasing returns to scale (profit scale economies exist). If the value of profit scale economies is less than one, however, there are decreasing returns to scale. Again, a value equal to one indicates constant returns to scale. The measure of cost scale economies is calculated as follows:* A bank’s technological progress is also derived from the frontier functions. It is measured by the partial derivative of cost with respect to the time trend. When it comes to the profit frontier function, technological progress is measured by the formulation of the partial derivative of profit with respect to the time trend measures. Thus, technological progress is calculated as follows:°
Table 1 Variables used in the stochastic frontier model Berger and Humphrey (1992) point out that for deposits, banks pay interest rates that are inferior to the market interest rate. This difference constitutes the implicit cost of deposits supported by depositors. Thus, deposits can be considered outputs. Berger and Humphrey 1992) emphasise that the problem of implicit cost is particularly essential when one estimates cost efficiency. Because it estimates a cost frontier function in addition to a profit frontier function, this study uses the value-added approach to define outputs. This approach is also used by Humphrey and Pulley (1997), Carvallo and Kasman (2005), Fries and Taci (2005), and Berger et al. (2009). To estimate the cost frontier, two outputs are identified: the loan portfolio and deposits. The same approach is used to estimate profit efficiency, except that the endogenous variable, C, is replaced by P, for estimating he profit frontier function.
Table 1 Variables used in the stochastic frontier model Berger and Humphrey (1992) point out that for deposits, banks pay interest rates that are inferior to the market interest rate. This difference constitutes the implicit cost of deposits supported by depositors. Thus, deposits can be considered outputs. Berger and Humphrey 1992) emphasise that the problem of implicit cost is particularly essential when one estimates cost efficiency. Because it estimates a cost frontier function in addition to a profit frontier function, this study uses the value-added approach to define outputs. This approach is also used by Humphrey and Pulley (1997), Carvallo and Kasman (2005), Fries and Taci (2005), and Berger et al. (2009). To estimate the cost frontier, two outputs are identified: the loan portfolio and deposits. The same approach is used to estimate profit efficiency, except that the endogenous variable, C, is replaced by P, for estimating he profit frontier function.
Note: Data are in thousands Gourds, except for E which is the equity to asset ratio.
Note: Data are in thousands Gourds, except for E which is the equity to asset ratio.
Note: *Indicates significance at the 1% level. lable 3 Effects of foreign banks and size on the frontiers and inefficiency effects (t-statistics in brackets)
Note: *Indicates significance at the 1% level. lable 3 Effects of foreign banks and size on the frontiers and inefficiency effects (t-statistics in brackets)
Note: *Indicates significance at the 1% level. able 4 The results of cost estimations are ambiguous (t-statistics in brackets)
Note: *Indicates significance at the 1% level. able 4 The results of cost estimations are ambiguous (t-statistics in brackets)
Note: *Indicates significance at the 1% level. ible 5 The results of profit estimations are robust (t-statistics in brackets)
Note: *Indicates significance at the 1% level. ible 5 The results of profit estimations are robust (t-statistics in brackets)
Table 6 Average profit scale economies for banks in Haiti Note: Ital numbers indicate that there are scale economies.
Table 6 Average profit scale economies for banks in Haiti Note: Ital numbers indicate that there are scale economies.
Related topics:
Stochastic Frontier AnalysisForeign OwnershipProfit Efficiency
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