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Definition of Quiet Life Hypothesis (QLH) and Efficient Structure Hypothesis (ESH)
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Definition of Quiet Life Hypothesis (QLH) and Efficient Structure Hypothesis (ESH)

Definition of Quiet Life Hypothesis (QLH):

According to the neo-classical theorists the participants of the market having influential
power over the prices and outputs usually set their prices above the marginal costs to maximize
their profits (Turk Ariss, R., 2010, p.768). The producer rents that are extracted entail the losses
in terms of social welfare that the consumers incur. Sometimes the producers may let go of these
rents for inefficiencies. Therefore, the Quiet Life Hypothesis has been derived whereby the
agents having market power use their power to make themselves inefficient systematically. The
Quiet Life Hypothesis is therefore a concept that is more applicable to banks because they often
avoid showing off their abnormal returns because of the statutory regulations and duties imposed
upon them by the state. In the US banking industry the commercial banks tend to usually reduce
their risks instead of attaining their profit maximizing goal.
The Quiet Life Hypothesis is a combination of competition and efficiency. It states that the firms
in monopolistic markets tend to use their influential power to allocate resources inefficiently
rather than to maximize their profits and extract rents. The firms do so because the subject cost
of the management incurred to reach optimal profits can be well above the marginal revenues or
gains. X-inefficiency is the term used for the welfare losses which result from the inefficient
allocation of resources. In an economy oriented by market the x-inefficiencies are important than
the welfare losses that result from the monopoly prices. Sometimes, the management becomes
unable to see the costs of production that are incurred by the firm which leads the firm into
operational slack. The mismanagement on the part of the bank or firm can result in the total costs

to rise. In the behavior of the organizations it is often observed that the increase in competition
leads to the reduction in operational costs and hence slack of the organization. The increase in
competition leads the management to work even harder than usual and therefore have to
consume lesser resources (Maudos, J., & de Guevara, J. F., 2007, p. 2114).
The US banking industry has a negative relationship between the level of competition
and efficiency. The economic losses due to the x-inefficiencies that result from the monopolistic
powers of banks are greater than the losses that result from the misallocation of resources due to
increase in prices and decreased output. Therefore, the existence of the Quiet Life Hypothesis is
obvious in the commercial banks especially in their operations as their high level of market
power is associated with their inefficiencies in terms of operational costs.

Definition of Efficiency Structure Hypothesis:

The Efficiency-Structure Hypothesis the performance and efficiency of an organization
make up and shape the structure of the firm. The hypothesis is of the view that the banks increase
their efficiency to gain the share of the market which results in the competition to increase and
the concentration of the market to rise. Therefore, an efficient banking market would tend to
have a more concentrated market (Gelos, R. G., & Rolds, J., 2004, p. 40).
The banking industry has seen massive restructuring in the recent past which has resulted
in the industry to become more concentrated and stable. The banks that have remained distressed
for long have undergone restructuring which includes various strategies like investment of more
capital, making sure that the financial statements present the true picture of the bank and
consolidation and merger of the weaker banks with high performing banks. The restructuring

process enhances the performance of the banks and increases the competition in the market.
Privatization can also be an option of restructuring which involves withdrawal of the government
influence from the banking sector. The restructuring process results in the banking industry of the
local market to become more competitive with an improvement in the performance of the local
banks which hence helps in retention of the market share by the local banks. The local banks can
also increase their market share which helps in avoiding the loss of market share to foreign
entrants (Williams, J., & Nguyen, N., 2005, p.2130).
The banking sector comprises of monopolistic competition and if the barriers to entry in
such markets are lowered the foreign participants might come into the local banking industry
which thus leads to loss of market share but in the same time can help in offsetting the adverse
impacts of the intensity of competition (Hawkins, J., & Mihaljek, D., 2001, p. 39).
The increase in competition in the banking industry gives rise to increase in concentration
of the industry. The increased competition in return offers the banks to collude with one another
and earn higher profits by setting their prices above the marginal costs of producing financial
services. The increase in competition leads to enhancement of resource allocation on the part of
the banks which in return decreases the costs and enables the banks to generate higher returns
and profits (Vo, Ngoc, and Jonathan Williams, 2012).
Hence, the Efficient Structure Hypothesis assumes that efficiency of banks is determined
through their structure. The increase in competition gives a rise to the concentration of the
market which hence results in the performance of the market to improve.

References
Williams, J., & Nguyen, N. (2005). Financial liberalisation, crisis, and restructuring: A
comparative study of bank performance and bank governance in South East
Asia. Journal of Banking & Finance, 29(8), 2119-2154.
Vo, Ngoc, and Jonathan Williams. "Bank Restructuring and Bank Stability in Latin
America." Modern Bank Behaviour (2012): 48.
Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from
developing countries. Journal of Banking & Finance, 34(4), 765-775.
Maudos, J., & de Guevara, J. F. (2007). The cost of market power in banking: Social welfare loss
vs. cost inefficiency. Journal of Banking & Finance, 31(7), 2103-2125.
Gelos, R. G., & Rolds, J. (2004). Consolidation and market structure in emerging market
banking systems. Emerging Markets Review, 5(1), 39-59.
Hawkins, J., & Mihaljek, D. (2001). The banking industry in the emerging market economies:
competition, consolidation and systemic stability: an overview. BIS Papers, (4), 1-44.