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TECHNICAL AND ALLOCATIVE EFFICIENCY IN EUROPEAN BANKING

Sophocles N. Brissimis
Bank of Greece and University of Piraeus

Matthaios D. Delis
Athens University of Economics and Business

Efthymios G. Tsionas
Athens University of Economics and Business

ABSTRACT

This paper specifies an empirical framework for estimating both technical and allocative efficiency, which is applied to a large panel of European banks over the years 1996 to 2003. Our methodology allows for self-consistent measurement of technical and allocative inefficiency, in an effort to address the issue known in the literature as the Greene problem. The results suggest that, on average, European banks exhibit constant returns to scale, that technical and allocative efficiency are close to 80% and 75% respectively, and that overall economic efficiency shows a clearly improving trend. We also show through the comparison of various estimators that models incorporating only technical efficiency tend to overestimate it.

Keywords: Technical and allocative efficiency; Translog cost function; Maximum likelihood; European banking

JEL classification: C13; G21; L2

Acknowledgements
The authors would like to thank Heather Gibson and Theodora Kosma for very helpful comments. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.

Correspondence:

Sophocles N. Brissimis
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece,
Tel. +30 210 320 2388
E-mail: sbrissimis@bankofgreece.gr


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