The efficiency of Japanese financial cooperatives: An application of parametric distance functions

This study investigates the efficiency of Japanese credit cooperatives by using a stochastic frontier method based on distance functions. We use a single-step estimation procedure where the parameters of the stochastic frontier and the inefficiency model are estimated simultaneously. Moreover, we focus on the differences in four groups classified by the type of membership. The findings reveal that ethnic minority-owned cooperatives, which have experienced drastic consolidation over the past two decades and increased size, are more efficient than the other groups. The main results are robust to the use of an alternative estimation procedure. This study emphasizes the potential merger effects of small financial cooperatives, but the sustainability of small institutions is not strongly supported.