An entropy approach to size and variance heterogeneity in U.S. commercial banks
Commercial Banks, Cost Frontier, Heteroskedasticity, Maximum Entropy
Journal of Economics and Finance
In this paper, we investigate the effect of bank size differences on cost efficiency heterogeneity using a heteroskedastic stochastic frontier model. This model is implemented by using an information theoretic maximum entropy approach. We explicitly model both bank size and variance heterogeneity simultaneously. We find that non-performing loans, federal insurance premium, legal expenses and director fees drive bank inefficiency as the bank becomes larger. Moral hazard, bank management and a "too big to fail" doctrine are likely explanations for the results from this study. © 2010 Springer Science+Business Media, LLC.
Original Publication Date
DOI of published version
Balasubramanyan, Lakshmi; Stefanou, Spiro E.; and Stokes, Jeffrey R., "An entropy approach to size and variance heterogeneity in U.S. commercial banks" (2012). Faculty Publications. 1776.