Dear Tesfaye, as the x-inefficiency is due to the lack between efficient behavior implied by economic theory and the observed behavior, caused by a lack of competitive pressure, I suppose that you can search for banks x-inefficiency on the side of costs (the lack of competition makes it possible to use inefficient production techniques and still stay in business). I think it will be interesting to run a DEA on the relation between the bank funding (considered as output) and the operative costs of the bank (input).

Thanks for the very useful response. 

In my opinion, you should estimate either cost and profit inefficiency. Indeed, the cost side in important like was demonstrated by Dr. Quirino Biscaro but many research studies have shown that analyzing Bank efficiency from the cost side only can bee isufficient because it is important for bank managers to measure the inefficiency of their banks from the profit side to have a better evaluation of their bank x-efficiency.

thanks Raef

Dear Tesfaye, You must pay attention if you analyze the x-inefficiency with reference to an output (profit). It is possible, but in this case efficiency is very often confused with effectiveness, that is the ability to achieve the desired result. If you include an output (profit) in a efficiency analysis, this output must be a parameter because the variables are the resources (costs) involved in the task. The mathematical definition of efficiency (inefficiency) is very clear: it is a measure of which the inputs are well used for an intended task or output function.

All of them will reflect aspects of x-inefficiency.

Actually, stochastic frontier analysis (SFA) is superior to DEA as it allows for random effects to influence to the observed input and output data.  Also, I would recommend looking the discounted present value of all free cash flows and not a single-period measure of profit.  In addition, one should take care for differences in risk across different banks' production plans / strategies (something that conventional SFA and DEA do not do).   See Hughes et al. (2003, J. of Banking & Finance) for an example of how to handle the above issues.  Good luck with your research efforts!

X-efficiency is the managerial efficiency. It three components:

1. Allocation efficiency 2. Technical efficiency 3. Overall efficiency

It can be measured in term of 1.Cost (Cost function) 2. Productivity (production function) 3. Profitability (Profit function)

The research might us one of two approaches to test the above function:

1. Parametric approach or

2. Non-parametric approach

Recently x-efficiency become very essentially comparing to scale efficiency (size) and scope efficiency. It might represents more than 20% of the wasted resources that used to optimize to revenue of the intuition.

For more information please read my articles in X-efficiency

Thank you for very clear responses.