A spatial productivity index in the presence of efficiency spillovers: Evidence for U.S. banks, 1992-2015

We present the methodology for a new spatial decomposition of total factor productivity (TFP) growth. The relevant literature is underdeveloped as there is just one short study which proposes a partial spatial TFP growth decomposition. We develop this literature in four respects. The first two developments are methodological to go from a partial decomposition to a complete one. First, we augment the partial decomposition with a cost efficiency spillover growth component. Second, we introduce own and spillover allocative efficiency growth components. Third, we provide a more detailed coverage of the spatial decomposition of TFP growth. Fourth, in contrast to the traditional application to geographical areas (e.g., countries) in the relevant literature, we apply our decomposition using firm level data, which suggests that there can be an important role for spatial productivity analysis in OR. Our application is to large U.S. banks over the period 1992–2015. Among other things, we find for the average large U.S. bank that TFP growth since the financial crisis has become much more dependent on the bank itself and less so on spatial spillovers.