Competition, Risk-Taking, and Input–Output Contributions to Efficiency: A WRDDM Perspective on Pakistani Banks

https://doi.org/10.5281/zenodo.17857430

Abstract

This study examines the nexus between competition, risk-taking behaviors, and bank performance, where performance is measured using technical efficiency. For measuring technical efficiency this study employed Weighted Russell Directional Distance Model (WRDDM) that quantifies the contribution of each input and output to inefficiency. This approach is particularly useful in identifying operational inefficiencies at a granular level. The results reveal that non-performing loans (NPLs) and excessive labor costs are the major contributors to inefficiency in private, state-owned, and foreign banks, while Islamic banks exhibit inefficiencies due to lower asset utilization. By identifying these inefficiency sources, WRDDM provides actionable insights for banks to optimize resource allocation and improve operational efficiency. Furthermore, it investigates the impact of competition and various risk-taking behaviors (credit risk, liquidity risk, and insolvency risk) on banking efficiency. Bootstrap truncated regression is employed to investigate the impact of competition and risk along with other bank-specific, industry-specific and macroeconomic variables on the technical efficiency of the Pakistani banks. Results revealed that competition asserted positive while credit and insolvency risks have negative impact on technical efficiency.