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Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope

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  • Lawrence, Colin

Abstract

Recently, researchers have claimed that the primitive Cobb-Douglas production technology captures banking cost functions adequately. These findings rule out scope economies and U-shaped cost curves. The rejection of the generalized flexible form postulated by the above authors is a necessary, but not a sufficient, condition to justify a Cobb-Douglas specification. Using restricted generalized functional forms, the authors find that the composite output Cobb-Douglas specification is an inadequate description of banking cost technology. Translog specifications with multiple products capture the data best, suggesting the presence of both scope and scale economies. Copyright 1989 by Ohio State University Press.

Suggested Citation

  • Lawrence, Colin, 1989. "Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 368-379, August.
  • Handle: RePEc:mcb:jmoncb:v:21:y:1989:i:3:p:368-79
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    Citations

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    Cited by:

    1. Suominen, Matti, 1991. "Competition in Finnish banking: Two tests," Bank of Finland Research Discussion Papers 8/1991, Bank of Finland.
    2. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, vol. 76(Sep), pages 38-50.
    3. Stephen M. Miller & Terrence M. Clauretie & Thomas M. Springer, 2006. "Economies Of Scale And Cost Efficiencies: A Panel‐Data Stochastic‐Frontier Analysis Of Real Estate Investment Trusts," Manchester School, University of Manchester, vol. 74(4), pages 483-499, July.
    4. Danny Leung & Terence Yuen, 2007. "Labour Market Adjustments to Exchange Rate Fluctuations: Evidence from Canadian Manufacturing Industries," Open Economies Review, Springer, vol. 18(2), pages 177-189, April.
    5. H. Naci Mocan, 1995. "The Child Care Industry: Cost Functions, Efficiency, and Quality," NBER Working Papers 5293, National Bureau of Economic Research, Inc.
    6. Evren Ors, 2004. "Postmortem on the Federal Reserve's Functional Cost Analysis Program: how useful was the FCA?," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 121-148.
    7. Tiffany Hutcheson & Ian G. Sharpe, 1998. "Ownership Structure and Building Society Efficiency," Australian Journal of Management, Australian School of Business, vol. 23(2), pages 151-168, December.
    8. Jason Allen & Ying Liu, 2007. "Efficiency and economies of scale of large Canadian banks," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(1), pages 225-244, February.
    9. Elyas Elyasiani & Rasoul Rezvanian, 2002. "A comparative multiproduct cost study of foreign-owned and domestic-owned US banks," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 271-284.
    10. Madhav Regmi & Allen M. Featherstone & Cortney A. Cowley & Mykel R. Taylor, 2021. "Big Banks versus Agricultural Banks: Has Too‐Big‐To‐Fail Regulation Affected Efficiency and Scale Economies Measures?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 1164-1178, May.
    11. Toivanen, Otto, 1997. "Economies of scale and scope in the Finnish non-life insurance industry," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 759-779, June.
    12. Shaik, Saleem & Addey, Kwame & Yeboah, Osei, 2017. "Efficiency Gains Due To Economies Of Scope And Scale," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252790, Southern Agricultural Economics Association.
    13. Jun Du & Sourafel Girma, 2011. "Cost economies, efficiency and productivity growth in the Chinese banking industry: evidence from a quarterly panel dataset," Empirical Economics, Springer, vol. 41(1), pages 199-226, August.
    14. Helmers, Glenn A. & Shaik, Saleem & Atwood, Joseph A., 2003. "Social And Scale Efficiency Gains Due To Vertical Integration In The U.S. Hog Sector," 2003 Annual Meeting, February 1-5, 2003, Mobile, Alabama 35143, Southern Agricultural Economics Association.
    15. Ors, Evren, 2004. "Postmortem on the Federal Reserve's Functional Cost Analysis Program: how useful was the FCA?," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 121-148.
    16. Stephen M. Miller & Thomas M. Springer, 2007. "Cost Improvements, Returns to Scale, and Cost Inefficiencies for Real Estate Investment Trusts," Working papers 2007-05, University of Connecticut, Department of Economics.
    17. Noha Farrag & Guenter Lang, 2012. "The Egyptian Banking Sector: Assessing Efficiency Using a Stochastic Frontier Cost Function," Working Papers 33, The German University in Cairo, Faculty of Management Technology.
    18. Helmers, Glenn A. & Langemeier, Michael R. & Shaik, Saleem, 2005. "Measuring Scope And Scale Efficiency Gains Due To Specialization," 2005 Annual meeting, July 24-27, Providence, RI 19388, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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