Malmquist indexes using a geometric distance function (GDF). Application to a sample of Portuguese bank branches

Traditional approaches to calculate total factor productivity (TFP) change through Malmquist indexes rely on distance functions. In this paper we show that the use of distance functions as a means to calculate TFP change may introduce some bias in the analysis, and therefore we propose a procedure that calculates TFP change through observed values only. Our total TFP change is then decomposed into efficiency change, technological change, and a residual effect. This decomposition makes use of a non-oriented measure in order to avoid problems associated with the traditional use of radial oriented measures, especially when variable returns to scale technologies are to be compared. The proposed approach is applied in this paper to a sample of Portuguese bank branches. 1 The authors acknowledge the financial support of the Portuguese Foundation for Science and Technology, and the European Social Fund. The contents of the paper are the responsibility of the authors. M. C. A. Silva Portela (B) Universidade Católica Portuguesa, Centro Regional do Porto, R. Diogo Botelho, 1327, 4169-005 Porto, Portugal E-mail: [email protected] E. Thanassoulis Aston Business School, Aston Triangle, B4 7ET Birmingham, U.K. E-mail: [email protected]