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Estimation of scale and scope economies in multiproduct banking: evidence from the Fourier flexible functional form with panel data

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  • Tai-Hsin Huang
  • Mei-Hui Wang
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    Abstract

    An empirical study is conducted on scale and scope economies for Taiwan's banking industry with panel data using a Fourier flexible cost function developed by Gallant and a translog cost function, both of which take economic efficiency into account. It is found that the Fourier form is more appropriate than the traditional translog form in fitting the data, and that various efficiency measures computed using the Fourier function are compatible with each other, while those computed using the translog function are not. The Fourier evidence shows that sample banks continue to enjoy economies of scale, and exhibit scope diseconomies, which indicates that greater product diversification can reduce banking costs through product-mix economies. Banks may benefit from further diversifying their line of financial services.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000247415
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 36 (2004)
    Issue (Month): 11 ()
    Pages: 1245-1253

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    Handle: RePEc:taf:applec:v:36:y:2004:i:11:p:1245-1253

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    References

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    1. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Allen N. Berger & John H. Leusner & John Mingo, 1994. "The efficiency of bank branches," Finance and Economics Discussion Series 94-26, Board of Governors of the Federal Reserve System (U.S.).
    3. Allen N. Berger & Gerald A. Hanweck & David B. Humphrey, 1986. "Competitive viability in banking: scale, scope, and product mix economies," Research Papers in Banking and Financial Economics 82, Board of Governors of the Federal Reserve System (U.S.).
    4. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April.
    5. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    6. Eastwood, Brian J. & Gallant, A. Ronald, 1991. "Adaptive Rules for Seminonparametric Estimators That Achieve Asymptotic Normality," Econometric Theory, Cambridge University Press, vol. 7(03), pages 307-340, September.
    7. DeYoung, Robert & Hasan, Iftekhar & Kirchhoff, Bruce, 1998. "The Impact of Out-of-State Entry on the Cost Efficiency of Local Commercial Banks," Journal of Economics and Business, Elsevier, vol. 50(2), pages 191-203, March.
    8. Wang, Hung-Jen, 2006. "Stochastic frontier models," MPRA Paper 31079, University Library of Munich, Germany.
    9. Atkinson, Scott E & Cornwell, Christopher, 1994. "Estimation of Output and Input Technical Efficiency Using a Flexible Form and Panel Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 245-55, February.
    10. Chalfant, James A. & Gallant, A. Ronald, 1985. "Estimating substitution elasticities with the Fourier cost function : Some Monte Carlo results," Journal of Econometrics, Elsevier, vol. 28(2), pages 205-222, May.
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    Cited by:
    1. Kauko, Karlo, 2009. "Managers and efficiency in banking," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 546-556, March.
    2. Yu-Shan Chen & Ching-Hsun Chang, 2013. "Enhance environmental commitments and green intangible assets toward green competitive advantages: an analysis of structural equation modeling (SEM)," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(1), pages 529-543, January.

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