A dynamic network DEA model with an application to Japanese Shinkin banks

Abstract

We develop a dynamic network production technology to measure productivity change for 269 Japanese Shinkin banks during 2002–2009. The network technology consists of two stages. In the first stage, labor, physical capital, and equity capital are employed to produce the intermediate output of deposits. In the second stage, deposits are used to produce desirable outputs of loans and securities investments and an undesirable output of nonperforming loans. Those nonperforming loans become an undesirable input in the first stage of production during the next period. Any increase in nonperforming loans requires an increase in first stage inputs, such as equity capital, to offset their effects. The dynamic framework allows bank managers to maximize production possibilities over several periods. Thus, if a bad economy exists, bank managers might choose to forego some current lending opportunities in order to reduce nonperforming loans and simultaneously reallocate resources to periods when the economy might be expected to improve. The directional distance function is used to measure bank performance and it is estimated using data envelopment analysis (DEA).

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