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Nonparametric estimation of returns to scale using input distance functions: an application to large U.S. banks

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  • Diego Restrepo-Tobón
  • Subal Kumbhakar

Abstract

We derive new measures of returns to scale based on input distance functions (IDFs) and estimate them using nonparametric regression methods. In contrast to the cost function approach, the IDF does not require input prices which are usually unavailable or measured imprecisely. In addition, we can account for equity and physical capital in the IDF. These variables are either excluded from the analysis (especially in a cost function approach) or treated as quasi-fixed inputs, because their prices are not readily available. In our application, we use data for bank holding companies and large commercial banks in the U.S. from 2000 to 2010. We find that although some of these institutions enjoy increasing returns to scale, scale economies are economically small. Thus, concerns about potential cost increases arising from breaking up large banking organizations seem exaggerated, especially from the scale economies point of view. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Diego Restrepo-Tobón & Subal Kumbhakar, 2015. "Nonparametric estimation of returns to scale using input distance functions: an application to large U.S. banks," Empirical Economics, Springer, vol. 48(1), pages 143-168, February.
  • Handle: RePEc:spr:empeco:v:48:y:2015:i:1:p:143-168
    DOI: 10.1007/s00181-014-0831-9
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    Cited by:

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    2. Emir Malikov & Subal C. Kumbhakar & Mike G. Tsionas, 2016. "A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of us Banks in 2001–2010," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1407-1429, November.

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    More about this item

    Keywords

    Nonparametric regression; Returns to scale; Distance functions; Banks; D24; G21; L13; C14;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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