Efficiency gains from recent U.S. bank consolidations are evaluated in this study. Our analysis is based on the well-developed duality theory, according to which we can use a profit function to explore some characteristics of the production process. This profit function correlates bank profits with prices of outputs, prices of variable inputs, and quantities of fixed inputs. All those variables are taken as exogenous. The measurement of profit efficiency is decomposed into scale efficiency, structural efficiency, and X-efficiency. Each of these measures can be derived from the specific profit function we construct. On the basis of empirical estimation, the following conclusions can be drawn: First, in terms of scale efficiency, consolidations benefit the participants by increasing their scale. This advantage remains after consolidations. Second, in terms of structural efficiency, consolidations substantially benefit banks by making them adjust their inputs and outputs. These gains come 136 from the combined effect of structural efficiency and allocative X-efficiency. In light of conclusions from earlier literature, it is likely that most of these gains come from higher structural efficiency, leaving allocative X-efficiency hardly changed. Third, the analysis of technical X-efficiency shows that banks are highly inefficient in carrying out their production plan before consolidations. Moreover, this inefficiency worsens after consolidations. Further analysis finds that, after consolidations, production plan enforcement improves in input employment, but deteriorates in output provision. Fourth, consolidations also improve some factors that are not observable in this study. We assume these factors include managerial ability, efforts of the executives, corporate control in banking operations, and some other special characteristics of individual banks. Finally, from the perspective of overall profit efficiency, it is concluded that bank consolidations bring no significant efficiency gain to the participants.
