Long- and short-run non-parametric cost frontier efficiency: An application to Spanish savings banks

The utilisation rate of installed capacity is a popular concept in both the performance appraisal literature and in publications on industrial organisation. However, a common consensus has yet to be reached concerning the most appropriate way to measure the capacity utilisation of physical inputs and its final effect on company results. On the one hand, there are approaches that establish capacity utilisation with reference to the maximum level of production that can be achieved. In contrast, there are other approaches more strictly related to economic analysis of operating costs. In this paper, our main objective is to define an analytical process that uses non-parametric frontier methodology to provide the distance between the total costs of a given unit and the short-run frontier costs. As a natural extension of this proposal, it is possible to compute the short-run inefficiency caused by a non-optimal dimension of the fixed inputs: we define this as capacity efficiency. The proposed evaluation process is applied to Spanish savings banks covering the period between 1986 and 1995. Throughout the period analysed, the greater part of cost inefficiency is due to capacity efficiency. © 2002 Elsevier Science B.V. All rights reserved.