Revisiting the quiet life hypothesis in Indian banking: a dynamic network efficiency approach

This study empirically tests the Quiet Life Hypothesis (QLH) in Indian banking using a three-stage dynamic network production model. The model deconstructs bank efficiency into three sequential operations: liability creation, asset transformation, and income generation, moving beyond the traditional ‘black-box’ paradigm to pinpoint inefficiencies at each distinct stage. A key innovation is the endogenization of technology, where technology expenditure is treated as a distinct input, revealing its role in strategic resource allocation. Analysing data from 2005 to 2024, we find no evidence supporting the QLH. The results demonstrate that conventional black-box efficiency estimates are misleading, as they mask significant inefficiencies embedded particularly in the asset transformation and revenue generation stages. We identify bank size, diversification, and human capital as key determinants of network efficiency. The findings suggest that structural reforms, regulatory interventions, and technological adoption have collectively prevented market power from eroding efficiency. Consequently, the results affirm a positive association between market power and network efficiency across composite, adjusted, and stochastic measures of the Lerner index. This underscores the importance of structural reforms, regulatory intervention, and technological integration in driving Indian banks towards operational excellence, even amidst rising market concentration.