E¢ ciency, Technical Change, and Returns to Scale in Large U.S. Banks: Panel Data Evidence Based on Bayesian Estimation of the Output Distance Function

This paper provides parametric estimates of technical change, e¢ ciency change, economies of scale, and total factor productivity growth for large banks (those with assets in excess of $1 billion) in the United States, over the period from 2000 to 2005. In doing so, we propose a distance function based primal total factor productivity growth index, which is valid under both perfect and imperfect competition, and estimate the output distance function, subject to theoretical regularity, within a Bayesian framework. The results show that total factor productivity of the large U.S. banks grew at an average rate of 1.98% over the sample period. However, our estimates also show a clear downward trend in the growth rate of total factor productivity and our decomposition of the primal Divisia total factor productivity growth index into its three components — technical change, e¢ ciency change, and economies of scale — indicates that technical change is the driving force behind this decline. JEL classi…cation: G21; G28; D24; E58; C11.