The authors show how this shift can be implemented using the Almost Ideal Demand System. In addition, the authors suggest a more general way of measuring efficiency that can incorporate a concern for the market value of firms' assets and equity and identify value-maximizing firms. This shift in focus bridges the gap between the risk-incentives literature in banking that ignores the microeconomics of production and the production literature that ignores the relationship between production decisions and risk.
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Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking
June 2000
WP 00-05 – The authors argue for a shift in the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing technologies.
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