Robust Nonparametric Estimation of Efficiency and Technical Change in U.S. Commercial Banking

This paper examines the performance of the U.S. commercial banking industry over 1984–2002. Rather than measuring performance relative to the unknown (and difficultto-estimate) boundary of the production set, performance for a given bank is measured relative to expected maximum output among m banks using no more of each input than the given bank. This approach permits fully non-parametric estimation with √ n-consistency, avoiding the usual curse of dimensionality that plagues traditional non-parametric efficiency estimators. The resulting estimates are robust with respect to outliers and noise in the data. ∗Wheelock: Research Department, Federal Reserve Bank, P.O. Box 442, St. Louis, MO 63166 (email: [email protected]). Wilson: Department of Economics, University of Texas, Austin, Texas 78712 USA (email: [email protected]). This research was conducted while Wilson was a visiting scholar at the Federal Reserve Bank of St. Louis. We have benefited from discussions with Léopold Simar. The usual caveats apply, i.e., any errors, omissions, etc. are solely our own.