Abstract
Duality between profit functions and transformation functions is applied to a subset of the banking system in the Philippines. By estimating the restricted profit functions of two groups of banks, hypothesis testing of their relative economic efficiency is carried out. By duality a complete characterization of the transformation function representing the two banking systems studied is obtained. Cobb-Douglas and quadratic profit functions are estimated. The mathematical properties of the functions allow a derivation of systems of supply functions for bank services, bank demand functions for resources, and measures of long-term profitability of banking. The regulatory environment's impact on bank efficiency may also be assessed.
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