Market power and efficiency of Indian banks: does the ‘quiet life’ hypothesis hold?

Purpose This paper investigates the relationship between market power and efficiency for Indian banks in order to test the validity of the quiet life hypothesis (QLH) during 2005-2019. Design/methodology/approach First, the bank-level DEA efficiency scores and three measures of the Lerner index – traditional, efficiency-adjusted, stochastic – are estimated. Then, efficiency scores are regressed on Lerner indices plus a set of banking and economic control variables. Findings We get robust evidence against the QLH. Moreover, the conventional Lerner index suggests that market power of Indian banks, as well as of the different bank groups, increased during the study period, due to a greater reduction in costs compared to that of the price of banking services. The efficiency scores also declined for the banking system as a whole, and for all bank groups except new private banks. Originality This is the first study testing the QLH for the different categories of Indian banks, and also provides robust inferences by using both stochastic and non-stochastic measures of market power.