A parametric approach to institutional quality and bank cost inefficiency in diversity context: The case of Italy

Abstract

Effective government rules and regulations, as well as the ability of the regulator to curb corruption and promote voice and accountability, can influence the ability of bank management to allocate resources and ensure high performance. Based on this assumption, we aim to find out whether institutional quality is able to improve bank performance in Italy. To do so, we rely mainly on the diversity of banks, thus capturing the different behaviors of the two main categories, i.e. cooperative and for-profit banks. Using a parametric method, the results show a clear impact of most dimensions of institutional quality on reducing banks’ cost inefficiency. Some robustness checks, especially regarding the role of market structure, confirm our findings.