Study the Relationship between Competition and cost Efficiency in Iran’s Banking Industry

An important factor affecting economic growth is the creation of an efficient financial system for financing high value-added activities. Accordingly, this study examined the relationship between cost efficiency and competition in Iran’s banking industry using data of 18 state-owned and private banks over the period of 2006-2015. To do so, we used trans-log cost function to measure the cost efficiency of banks and the adjusted Lerner index to estimate competition. The result of Tobit model estimation indicates that, an increase in competition, credit concentration, size of bank, and reducing economic growth could increase cost inefficiency; also the result of generalized method of moments (GMM) shows that an increase in efficiency will decrease competition. Therefore, the efficient-structure and information generation hypothesis can be accepted in Iran’s banking industry. Thus, it is essential to accurately monitor the entry of new banks by the central bank in order to improve the efficiency and performance of banking system in the field of credit and deposit interest rate.