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An Examination of Cost Subadditivity and Multiproduct Production in Large U.S. Banks

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Author Info
Hunter, William C
Timme, Stephen G
Yang, Won Keun
Abstract

This paper examines the subadditivity of costs for a sample of the largest commercial banks in the U.S. We introduce into the bank production literature the grid approach developed by Evans and Heckman (1984). We estimate two models of the bank cost function--one where deposits are treated as outputs, while in the other, deposits are treated as inputs. The models are estimated using the commonly used translog and the more flexible miniflex Laurent. Viewed narrowly, the findings imply that cost complementarities are not the RAISON D'ETRE for multiproduct production in the largest commercial banks. Subadditive costs, however, are sufficient but not necessary for multiproduct production. It is quite possible for multiproduct production to be optimal when output are produced independently (Levy and Haber (1986), and Teece (1980, 1982). It is only required that inputs be shareable as opposed to joint. Copyright 1990 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 22 (1990)
Issue (Month): 4 (November)
Pages: 504-25
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Handle: RePEc:mcb:jmoncb:v:22:y:1990:i:4:p:504-25

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  1. Christopher L. Holder, 1993. "The use of mitigating factors in bank mergers and acquisitions: a decade of antitrust at the Fed," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 32-44. [Downloadable!]
  2. Ana María Olaya Pardo & Manuel Ramírez Gómez, 2004. "Aversión al riesgo y eficiencia de escala en los bancos: Incluyendo variables de riesgo y regulación," BORRADORES DE INVESTIGACIÓN 004346, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
  3. David T. Llewellyn, 1999. "The New Economics of Banking," SUERF Studies, SUERF - The European Money and Finance Forum, number 5 edited by Morten Balling, October. [Downloadable!]
  4. Douglas D. Evanoff, 1998. "Assessing the impact of regulation on bank cost efficiency," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 21-32. [Downloadable!]
  5. Paul W. Bauer & Allen N. Berger & David B. Humphrey, 1991. "Inefficiency and productivity growth in banking: a comparison of stochastic econometric and thick frontier methods," Working Paper 9117, Federal Reserve Bank of Cleveland. [Downloadable!]
  6. Joseph Hughes & Loretta Mester, 1992. "Evidence on the Objectives of Bank Managers," Center for Financial Institutions Working Papers 94-15, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  7. Allen N. Berger & J. David Cummins & Mary A. Weiss & Hongmin Zi, 2000. "Conglomeration Versus Strategic Focus: Evidence from the Insurance Industry," Center for Financial Institutions Working Papers 99-29, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  8. Robert DeYoung & William C. Hunter, 2001. "Deregulation, the Internet, and the competitive viability of large banks and community banks," Working Paper Series WP-01-11, Federal Reserve Bank of Chicago. [Downloadable!]
  9. Claessens, Stijn & Klingebiel, Daniela, 1999. "Alternative frameworks for providing financial services," Policy Research Working Paper Series 2189, The World Bank. [Downloadable!]
  10. Allen N. Berger, 2000. "The integration of the financial services industry: where are the efficiencies?," Finance and Economics Discussion Series 2000-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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