Nonparametric Analysis of Profit Maximization Behavior of the Iranian Banks

The weak axiom of profit maximization (WAPM) is used to analyze the optimization behavior of 18 Iranian banks within 10 years (2000-2009). In general the banks in the Iranian economy can be divided into 2 groups, state and privately owned banks. Nonparametric nature of this test allows us to study the profit maximization behavior of the firms without the need for any assumption on functional form of underlying technology. The WAPM is checked under 2 assumptions: constant technology and nonregressive technological change. Although most of the banks violate the deterministic WAPM test, testing the stochastic WAPM with measurement error and believing in existence of at least 1 percent measurement error in data, show the behavior of the privately owned banks and one of the state owned banks is consistent with WAPM under nonregressive technological change assumption. Although the behavior of the state owned banks is consistent as well if one believes in 5 percent measurement error, the difference leads to this conclusion that performance of the state development policies and objectives by the state owned banks has been deviated from profit maximization behavior.