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A voluminous literature examines the banking sector efficiency and productivity following deregulations and market reforms. The literature mainly employs data envelopment analysis (DEA) which is a measure of relative efficiency and does not inform if the banks on the efficient frontier are indeed operating optimally. We model banks as profit cum welfare maximizing firms and analyse their absolute efficiency. We derive, inter alia, banker’s optimal level of efforts and productivity following reforms and deregulations. Our micro-founded model is put test, employing up-to-date econometric methods, on a panel of Nepalese commercial banks. Nepal embarked into deep financial reforms during 1986-1994 and witnessed profound structural changes in her financial system. Evidence suggests that bankers’ level of efforts and banking sector productivity have improved in Nepal following financial reforms
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