A principal–agent approach for estimating firm efficiency: Revealing bank managerial behavior

Abstract

We consider agency-theory-based structural and reduced form models of bank performance. In the structural models, we take into account the managerial decision-making processes, and reveal underlying managerial efforts and thereby managerial behavior. In an empirical application, we estimate performance of Eurozone banks using our novel structural and reduced form approaches by Markov Chain Monte Carlo techniques. Our findings show, for the first time, that bank underperformance persists in the Eurozone whereas considerable variability across Member States exists. Our agency-theory-based structural modeling would favor cooperation of all interested parties and towards higher financial integration.