A geographically weighted approach to measuring efficiency in panel data: The case of US saving banks

- We develop a new method to estimate efficiency that takes into account geography.
- The paper shows an empirical application to US banks.
- The method allows comparing peer banks that operate in different environments.
- We conclude that geography matters and plays an essential role in bank efficiency.

This paper discusses a new approach to controlling for the environment when estimating efficiency. In response to the literature on the international comparison of bank efficiency, we draw the attention to a local dimension of comparison. By introducing geographical weights and estimating local frontiers for each US savings bank in the 2001-09 period, we find that the bank technical performance is higher for most banks in comparison to a fixed-effects approach. This result highlights the importance of taking into account the local environment and constraints while analyzing banks' performance, so as not to consider the factors that are exogenous to these institutions as inefficiencies. Further analysis could improve the weighs calculation by employing other measures of interconnectedness besides geographical distance.