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Performance Measurement in Financial Institutions

1. Estimate the technical efficiency scores for each bank usingData Envelopment Analysis (DEA) under the followingassumptionsa. Constant returns to scale (CRS)b. Variable returns to scale (VRS)Briefly explain the difference between the twoassumptions.2. Estimate the cost efficiency for each bank using the VRSassumption. Now, estimate the allocative efficiency scores.Compare the cost efficiency, technical efficiency, andallocative efficiency scores for each ownership group andbriefly explain your results.3. Managerial ability is an unobservable trait of anorganization, and it is often estimated by the residual claimon bank efficiency after controlling for bank characteristics.For example, bank efficiency = firm characteristics +managerial ability. Use the bank efficiency scores youobtained in Part 1 above, under VRS assumption, toestimate managerial ability for the banks, and provide adensity distribution for it. Compare the managerial ability4between ownership groups. Briefly comment on why youchose the particular methodology to estimate managerialability.Guidance: The assignment consists of three distinct tasks above. Yourpaper should be presented in the form of a report with a 250words executive summary of your findings. This does notcount against the word count. Each task should contain ashort section or subsection header that alerts the reader onwhat is being done in that (sub)section. Sources youconsulted should be placed in the reference section. Use the information provided in the data file to group thedata accordingly in accord with the requirements above. Note that the data provided is in 000$ dollars. So, youshould scale the data before estimating the DEA models. You can use Excel, Stata, R, DEAP or any other softwareto compute estimates. Attach the computer output yougenerated in a clearly labelled Appendix. For example,Appendix A (what is contains); Appendix B (what itcontains), etc. The same goes for any charts, plots, etc.,that you choose to place in an appendix instead of the bodyof the main paper. Refer to the lecture slides and seminar hand-outs for moreguidance on how to utilise the software required to computethe estimates above. For example, you may simply wish toedit one of the sample R programs or Stata programs givenin lectures as a starting point, and use that to conduct youranalysis.