Title: Estimating a stochastic profit system using homogeneity in technology

Authors: Yongseung Han; Myeong Hwan Kim; Eréndira Yareth Vargas López

Addresses: Department of Economics and Finance, University of North Georgia, 1201 Bishop Farms Pkwy, Watkinsville, GA 30677, USA ' Department of Economics and Finance, Purdue University Fort Wayne, 2101 E. Coliseum Boulevard, Fort Wayne, IN 46805, USA ' Faculty of International Trade, University of Colima, 269 Elias Zamora Verduzco Ave., Manzanillo, Colima 28219, Mexico

Abstract: This paper estimates a stochastic profit system, which includes technical and allocative inefficiencies, in order to identify the source of profit inefficiency. Previously, the estimation of a stochastic profit system was not fully successful due to the entanglement of parameterised inefficiencies with a random error. We solve the problem by using homogeneity in technology since homogeneity enables a profit function to be separable into two parts: an output and a normalised profit function in which the parameter of technical inefficiency is absent. We apply our method to the Korean savings banks.

Keywords: profit efficiency; banking efficiency; productivity; Korean savings banks.

DOI: 10.1504/GBER.2020.108932

Global Business and Economics Review, 2020 Vol.23 No.2, pp.212 - 225

Received: 14 Nov 2018
Accepted: 03 May 2019

Published online: 06 Jul 2020 *

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