Cit represents the production costs of bank i at time t. We assume that production is
based on the factor inputs funding, labor and fixed capital, represented by w1it, w2it and
w3it, for each bank i and time t. We specify three different types of bank output: customer
loans, business loans and securities, represented by y1it, y2it and y3it. We also include
bank equity capital (zit) as further control variable into the translog cost function. vit
represents the model error term and ui the bank-specific inefficiency term. Additionally
we allow the production cost to contain a deterministic time trend & t to capture general
technological change. As usual, we impose homogeneity of degree one in the input prices
by dividing all factor prices and total production cost by the price of fixed capital. The
model is estimated using a stochastic cost frontier approach. Using Equation (2), the
marginal cost of bank i at time t can be calculated as