Measuring Welfare Cost of Banking Industry in Iran: The Approach of Allocative and X-inefficiency

This study examines the social cost of banking industry in Iran (17 governmental and private banks) in an unbalanced panel data model.To conduct estimations, two different approaches were taken: 1- Welfare Triangle approach; 2- Libenstein’s approach. In the former, welfare triangle is measured assuming banking industry operating in full technical efficiency; however, the latter includes both the effect of welfare triangle and the cost of likely technical X-inefficiency. The result of the first method showed that the social cost of banks in Iran is little, amounting to be less than 1 percent of GDP in 2008 while within the same period, the second method resulted in 4 percent of GDP, as the social cost of banks in Iran.