Testing the ‘Quiet Life’ Hypothesis in the Italian Banking Industry

In this paper we test the so‐called ‘quiet life’ hypothesis (QLH), according to which firms with market power are less efficient. Using data on the Italian banking industry for the period 1992–2007, we apply a two‐step procedure. First we estimate bank‐level cost efficiency scores and Lerner indices. Then we use the estimated market power measures, as well as a vector of control variables, to explain cost efficiency. Our empirical evidence supports the QLH, although the impact of market power on efficiency is not particularly remarkable in magnitude.

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