Are Co-operative Banks and Stock Banks Different Contracts? Empirical Evidence Using a Cost Function Approach

In this paper, I emphasise that the main prediction of the theoretical literature on the firm as an incentive structure is that different organisations (i.e. firms with different allocations of property rights) are characterised by different levels of social transaction costs, hence by different levels of economic inefficiency. I then propose a test of this prediction focusing on the banking industry. By using data on the Italian markets (where two types of co-operative banks co-exist together with stock banks), I estimate a standard translog cost function and I derive cost efficiency scores. Kruskall-Wallis tests indicate that mean efficiency scores are statistically different among the three types of banks, providing empirical support to the theoretical prediction that different organisations represent different incentive structures. Moreover, co-operatives banks appear more efficient than stock banks; hence, the efficiency gains stemming from the presence of scale economies seem to be dominated by the efficiency losses caused by the agency relationships within the bank in a more complex organisation. JEL classification: D23, G21, L22