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The stability of efficiency rankings when risk-preferences and objectives are different

1st Person: Koetter, Michael
Type of Publication: Paper
Language: English
Published: Deutsche Bundesbank 2006
Series: Discussion Paper Series 2
Keywords: Universalbank
Wirtschaftliche Effizienz
Technische Effizienz
Universal bank
Technical efficiency
Online: https://www.econstor.eu/bitstream/10419/19755/1/200608dkp_b.pdf
Description: We analyze the stability of efficiency rankings of German universal banks between 1993 and 2004. First, we estimate traditional efficiency scores with stochastic cost and alternative profit frontier analysis. Then, we explicitly allow for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, we estimate input and profit demand functions to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency. More importantly, rankorder correlation between these measures are low or even negative. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or profit efficiency may merely result from alternative yet efficiently chosen risk-return trade-offs.

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