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Liberalization, bankers’ motivation and productivity: A simple model with an application

Luintel, Kul, Selim, Sheikh and Bajracharya, Pushkar 2017. Liberalization, bankers’ motivation and productivity: A simple model with an application. Economic Modelling 61 , pp. 102-112. 10.1016/j.econmod.2016.11.017

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Abstract

Proponents of financial liberalization argue that deregulation motivates bankers to increase their effort and operate at a higher level of efficiency and productivity. Sceptics, however, see that liberalization engenders economic instability and banking crises, and impedes growth. Bank efficiency and productivity, following liberalization, is extensively examined. Nonetheless, the core issue of bankers’ self-motivation remains implicitly assumed and unaddressed. Does liberalization self-motivate bankers and increase their efforts and productivity? This paper models bank productivity from this perspective and evaluates what proportion of banks’ total factor productivity is accounted for by the self-motivated productivity of bankers. We provide a micro-founded framework for the analyses of bankers’ optimal level of effort and effort-driven productivity. Our model also captures banks’ unit input-output prices, optimal wages, bank spread and the overall cost of bank services – measures that are important in evaluating reform policies. We assess the financial liberalization of Nepal as a test case and find that (i) bankers’ efforts and productivity have notably improved in Nepal, although banking services have become costly, and (ii) bank spread has moderately declined in recent years. Our approach is parametric which differs from DEA, hence complements the literature. We hope this analytical framework will be useful to evaluate reform episodes elsewhere.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Uncontrolled Keywords: Liberalization; Incentives; Productivity; Panel integration; Cointegration; Simulation
Publisher: Elsevier
ISSN: 0264-9993
Date of First Compliant Deposit: 19 January 2017
Date of Acceptance: 24 November 2016
Last Modified: 22 Dec 2017 11:50
URI: http://orca.cardiff.ac.uk/id/eprint/97578

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