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Do credit unions use their tax advantage to benefit members? Evidence from a cost function

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  • W Scott Frame
  • Gordon V Karels
  • Christine A McClatchey

Abstract

This paper examines whether the credit union income tax subsidy is passed along to members or consumed by managers. To that end, we estimate a translog cost function for credit unions and mutual thrifts that is tailored to the unique objectives of mutually owned depository institutions. We find that credit unions with residential common bonds have higher costs than mutual thrifts, but single common bond occupational and associational credit unions are more cost efficient. Thus, it appears that residential credit unions engage in expense preference behavior and hence redirect some portion of their tax benefit away from members.

Suggested Citation

  • W Scott Frame & Gordon V Karels & Christine A McClatchey, 2003. "Do credit unions use their tax advantage to benefit members? Evidence from a cost function," Review of Financial Economics, John Wiley & Sons, vol. 12(1), pages 35-47.
    • Handle: RePEc:wly:revfec:v:12:y:2003:i:1:p:35-47
    DOI: 10.1016/S1058-3300(03)00005-3
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