Lurking in the Shadows: Testing For Shadow Price Differences with Applications in Economic Regulation

This project (in collaboration with Timo Kuousmanen(School of Business, Aalto University,Helsinki, Finland) and Ronan Gallagher(Business School, The University of Edinburgh, United Kingdom))  introduces a novel approach for statistically testing group differences in shadow price estimates produced by non parametric efficiency models.  The test can be applied across groups being assessed using a common efficient frontier or across groups assessed using different efficient frontiers. We demonstrate empirical use cases of each by analysing the impact of regulatory imposition in European banking. Preliminary results suggests significant unintended consequences of supranational regulation in terms of bank credit risk.