Work

Measuring multi-product banks’ market power using the Lerner index

Year: 2020

Type: article

Abstract: The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on total assets as the single aggregate output factor. We show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold. Under these conditions, the aggregate Lerner index reduces to a weighted-average of the product-specific Lerner indices. We test the three conditions for a sample of U.S. banks covering the years 2011–2017. All three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate Lerner index, depending on the economic context. As a general solution, we propose using the always consistently aggregated weighted-average Lerner index whenever a composite Lerner index is needed.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2020.105859

Authors: Sherrill Shaffer, Laura Spierdijk

Institutions: Australian National University, University of Wyoming, University of Groningen

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $1,950

Funders: Koninklijke Nederlandse Akademie van Wetenschappen, Nederlandse Organisatie voor Wetenschappelijk Onderzoek