Measuring Profit Efficiency of Colombian Banks: A Composite Nonstandard Profit Function Approach

We analyze the profit efficiency of the Colombian banking industry during the period 2001 - 2013. Unlike previous studies, we estimate revenue and cost efficiency separately and then compute profit efficiency as a composite measure of both cost and revenue efficiency. This approach overcomes the mis-specification problems of the traditional nonstandard profit function approach used in most of the literature regarding profit efficiency. We find that profit efficiency improved during the period under analysis mainly because gains in revenue efficiency. In addition, and in contrast with previous studies but in line with economic intuition, we find that while revenue and cost efficiency tend to be negatively correlated, each correlate positively with profit efficiency. Thus, improving either revenue efficiency or cost efficiency has a positive impact on profit efficiency.

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