engleski

Testing Out The "Quiet-Life" Hypothesis on Croatian Banking Sector

According to "Quiet-life" hypothesis (QLH) (Hicks 1935), market power can lead to lower cost efficiency, since it allows managers to enjoy a portion of the monopoly rents in the form of relaxed cost management. Although theoretically well founded, QLH empirical evidence is far from conclusive which represents one motive for this research. Additionally, better understanding of bank market power and efficiency relationship could result in social benefit as bank output is input for other sectors in economy. By testing out the QLH we extend the empirical work done so far on bank competition in Croatia on the sample of commercial banks (1994-2014). In the first step we use the Distribution free approach for the calculation of Competition efficiency frontier and X-efficiency. In the next step, we model bank efficiency with market power and the set of control variables. Negative relationship between market power and bank efficiency, which would prove QLH, is examined also for a sub-sample of banks and historical periods in Croatian banking sector. Although we provide empirical evidence generally supporting the QLH in Croatia, the connection between market power and bank efficiency is economically rather small. However, we believe that bank competition policy should definitely include “Quiet-life” considerations.

Quiet life hypothesis ; Croatia ; banks

Ovaj rad je djelomično podržan od strane Hrvatske zaklade za znanost kao dio znanstvenog projekta „Statistical Modelling for Response to Crisis and Economic Growth in Western Balkan Countries“ (STRENGTHS) ; Broj projekta: THRZZ-IP-2013-11-9402. Voditeljica: prof. dr. sc. Ksenija Dumičić