MEASURING COST EFFICIENCY IN BANKING - ECONOMETRIC AND LINEAR-PROGRAMMING EVIDENCE

This paper compares two techniques for estimating production economies and efficiencies. One approach involves the econometric estimation of a cost frontier; the second is a series of linear programs which calculate a production frontier. The two techniques are very different in principle, both possesing certain advantages and disadvantages. Our emperical implementation of these techniques shows that they yield very similar results regarding cost economies, and dissimilar results regarding cost efficiencies. These are important findings to the extent that policy decisions and evaluation often rely on only one of the two types of approaches available. © 1990.