Using a flexible translog cost function, this paper introduces an error specification to incorporate costs of technical and allocative inefficiencies. First, the maximum likelihood method is developed to obtain consistent parameter estimates of the cost function. These estimates are then used to...

Credit risk is crucial to understanding banks' production technology and should be explicitly accounted for when modeling the latter. The banking literature has largely accounted for risk by using ex-post realizations of banks' uncertain outputs and the variables intended to capture risk. This...

In this paper, the author considers specification and estimation of technical and allocative inefficiency in a cost-minimizing framework using panel data. Some distinguishing features of the model are (1) the functional form of the production technology is flexible enough to allow elasticity to...

This article investigates adverse selection and moral hazard in the voluntary deposit insurance system of Kansas, which operated from 1909 to 1929. Regulations were imposed to limit risk-taking and membership was made voluntary to assuage objections that insurance forces conservative banks to...

This paper considers an extension of technical inefficiency to a mor e disaggregate level, viz., input-specific technical inefficiency, based on a stochastic production frontier. Allocative inefficiency is modeled as a departure from the first order conditions for cost mini mization. The...