Abstract
The study develops a hypothesis validation process to test whether estimated cost inefficiency fits the theoretical distribution of the estimate of inefficiency, given the initial assumption of a half normal distribution for the inefficiency term in the stochastic frontier model. The application of this methodology to a sample of Spanish banks in the period 2002-2007 allows us to observe the evolution of the distributions of estimated cost inefficiency. The results confirm for the existence of a relationship between estimated cost inefficiency and the financial situation of these entities. In fact, an increase in the probability of higher levels of inefficiency is observed the period of study, coinciding with the beginning of financial instability in the Spanish banking system.
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