Market Power and Ownership: An evaluation to Indonesian banks efficiency

This paper evaluates cost efficiency in 117 Indonesian Banks for the period 2008 – 2021. This period stands for the ownership restructuration after the enactment of Single Presence Policy Act in Indonesia which reduces competition. Using Data Envelopment Analysis (DEA) and Two-step system GMM, we obtain two primary results. First, our results shows that higher market power is associated lower cost efficiency due to lower competitive pressure which create a space for managerial slack. Second, we observe that the market power effect to cost efficiency is ownership contingent. The quiet life hypothesis holds only for private banks while for government banks higher market power tend to be associated with higher cost efficiency. Furthermore, our extended analysis suggests this by showing that central government bank benefit more from higher market power compared to local government banks. These results suggest government banks may benefit from structural and institutional advantages associated with government ownership. Therefore, our results are consistent with the helping hand view in government ownership.