Recovering Risky Technologies Using the Almost Ideal Demand System: An Application to U.S. Banking

A model is presented and estimated that shifts the focus of modeling production from the traditional assumptions of profit maximization and cost minimization to a more general assumption of managerial utility maximization that can incorporate risk incentives into the analysis of production and recover value-maximizing technologies. The model is implemented using the almost ideal demand system. The estimation of the model for a sample of US commercial banks illustrates that results obtained from the generalized model can differ significantly from those obtained from the standard profit-maximization model, which ignores risk.