Profit change, Bennet-Bowley productivity and price change indicators

Abstract

This paper decomposes a normalised Bennet-Bowley (BB) productivity indicator into indicators of profit change and price change. An advantage of the method is that each indicator is calculated by substituting observed prices and quantities of inputs and outputs into a simple accounting formula. We extend Walden et al. (2017) and aggregate the indicators and account for the effects of new entrants, exits and continuing firms on profit change. We calculate each indicator for Japanese city banks, regional banks and Japan Post Bank during 2010-2016. Banking experiences productivity growth during 2010-2016 and profit change is also positive except during 2010-2011 and 2013-2014, when adverse price changes more than offset productivity growth. Regional banks make a greater contribution to increases in profits and productivity than city banks. Japan Post Bank experiences productivity decline throughout the period new entrants reduce industry profits, while exiting banks increase industry profits. Decreases in non-performing loans during the period contributed to increased profitability and productivity.