economies of scale and scope in the securities industry abstract economies of scale and scope for the securities industry are estimated for the first time using previously unavailable survey data and employing the translog multiproduct cost function model the results reveal economies of scale for smaller specialized firms and diseconomies of scale for larger more diversified firms economies of scope do not appear to be important in the industry if the glass steagall restrictions are relaxed the results suggest that banks can enter the securities industry with a brokerage division of moderate scale of about 30 million in revenues the five million in new equity required suggests that only banks with assets over 1 billion and over 60 million in capital can enter the industry with a relatively modest investment there are however a substantial number of banks with over 1 billion in assets who can be considered as potential entrants

a dynamic model of firewalls and non traditional banking abstract over the last decade there has been considerable public debate in the u s on the need to maintain legal barriers firewalls between commercial and non traditional banking however no theoretical model has yet been developed that examines the joint influence of various factors suggested such as competition production economies and regulatory subsidies that affect the bank s incentive to undertake non traditional activities this paper applies a stochastic control model to examine the joint effects of these factors on a bank s optimal investment decisions in non traditional banking and develops some empirically testable hypotheses

private sector involvement in the resolution of financial crises how do markets react abstract to correct the disincentives of liquidity assistance during financial crises the official sector attempts to involve the private sector in the resolution of debt crises this paper empirically tests the reaction of investors to announcements of private sector involvement psi for this purpose we disentangle shifts in risk premia incorporated in excess returns on emerging market bonds into changes in risk and shifts in the price of risk a regime switching arch m model is employed to separate two regimes with respect to the market price of risk while psi has no effect on risk it is shown that the likelihood of switching to a state with a high price of risk rises in response to psi announcements thus the results indicate that burden sharing was credible and hence effective

scale and scope economies in the multi product banking firm abstract the multi product nature of the banking firm is examined utilizing the translog cost function this analysis indicates that contrary to conventional wisdom natural monopoly scale economies and product specific decreasing costs are not robust characterizations of the banking industry there is however evidence that the cost function is characterized by economies of scope the implications of these results are discussed and extensions of this approach suggested

the technological determinants of the u s energy industry structure recent theoretical developments on multiproduct firm costs have increased our understanding of these firms yet to date empirical analysis of the relationship between multiproduct firm costs and industry structure has been limited in this paper the multiproduct nature of us energy producers is explicitly recognized and a multiproduct cost function estimated for the industry the empirical results indicate that the multiproduct structure of large energy firms has at least in part been motivated by economies of scope between petroleum and coal operations 27 references 19 footnotes 3 figures 1 table

scale economies and cost complementarities in commercial banks on and off balance sheet activities abstract bank off balance sheet obs activities have grown dramatically and have become significantly important especially at large banks we investigate whether failure to incorporate obs products may lead to a misspecification problem models that exclude deposits from the output specification suggest economies of scale which vanish when deposits are included we find that inclusion of obs products has little effect on the scale economies measures with only a few exceptions the results provide no evidence of cost complementarities in joint production the tremendous growth of bank obs activities in the 1980s may be explained by the very small approximately zero pecuniary cost of these activities

scale economies in banking a restructuring and reassessment the issue of scale economies in banking has a rich history most earlier studies report modest operating cost scale economies for small institutions those with less than about 50 million of deposits in 1968 dollars but are unclear where these economies might end if at all unfortunately these studies are limited in four important respects first those that were well specified did not measure the total cost of banking operations but concentrated on estimating scale economies for individual banking functions e g demand deposits separately from commercial loans second an average cost curve that could take a u shape over the full range of banks was not fitted either because larger banks were not included or because of the functional form used cobb douglas consequently the optimum or minimum cost size of a bank or office could not be determined third the variables measuring the costs of branching were misspecified fourth the branch

economies of scale and economies of scope in multiproduct financial institutions a study of british columbia credit unions this paper investigates the production technology facing computerized credit unions in canada a full system of translog cost equations is estimated in order to test for economies of scale economies of scope and other production characteristics in a multiproduct context the regression results indicate that most of the credit unions in our sample experience significant increasing returns to scale as they expand their level of output there is also evidence of cost complementarity or economies of scope in their mortgage and other lending activities as a result legislation which limits the ability of credit unions to grow and diversify will likely raise the operating costs of this important group of financial institutions additional structural tests of the most general translog specification suggest that none of the restrictive production conditions commonly imposed by other researchers using cobb douglas and ces specifications provide a valid representation of credit union technology the results of many earlier studies are therefore open to question this paper presents a number of structural tests of the production technology facing large computerized credit unions in canada a full system of translog cost equations is estimated using detailed cross sectional data on british columbia credit unions the parameter estimates obtained from our multiproduct specification allow us to test for economies of scale economies of scope and factor substitution unlike many earlier studies the present paper introduces the various outputs as separate variables instead of crudely proxying them with a single output measure such as total assets the total number of loans or the number of depositors by explicitly recognizing the multiproduct nature of the intermediation process we are able to address more interesting production questions and remove some of the bias caused by misspecification and measurement error in simpler approaches the flexible translog specification allows us to estimate the sensitivity of costs to proportionate increases in all outputs economies of scale as well as the cost savings firms realize by producing several outputs jointly rather than specializing in the production of one economies of scope the test results reported in the latter part of the paper suggest that increasing returns to scale exist in almost all of the credit unions in our sample though

traditional and nontraditional banking an information theoretic approach abstract this paper uses a multiproduct approach to analyze the costs of a sample of large banks where bank outputs are measured to account for the different types of information produced by banks diseconomies of scope are found between traditional banking activities of originating and monitoring loans and nontraditional activities of loan selling and buying this suggests maintaining fire walls between commercial bank functions and investment bank functions after the glass steagall act is repealed will not sacrifice joint production economies it also suggests that arguments for repeal of the act based on the existence of such economies are ill founded

the multibank holding company effect on cost efficiency in banking abstract this paper tests the hypothesis that differences in the organizational form embodied in independent banks one bank holding companies and multibank holding companies result in differences in operating cost efficiency the transaction and agency cost paradigms for analysis of organizational efficiency provide theoretical motivation for the hypothesis the effects of organizational form on bank operating expenses for individual banks are evaluated on subsamples divided into quartiles based on total revenue results indicate that for banks having revenues in the lowest quartile both one bank and multibank holding company affiliates are cost efficient relative to independent banks multibank holding company affiliates are cost efficient relative to both one bank affiliates and independent banks for banks in the interquartile range no significant differences in cost efficiency are noted banks in the highest revenue quartile relative efficiency at the organizational level is also evaluated results provide evidence of lower operating costs for banking operations of both multibank and one bank holding company organizations relative to independent banks taken as a whole the results imply that holding company affiliation conveys cost advantages to banking units below the 75th revenue percentile

endogenous business cycle propagation and the persistence problem the role of labor market frictions contrasting sharply with a recent trend in dsge modeling we propose a business cycle model where frictions and shocks are chosen with parsimony the model emphasizes a few labor market frictions and shocks to monetary policy and technology the model estimated from u s quarterly postwar data accounts well for important differences in the serial correlation of the growth rates of aggregate quantities the size of aggregate fluctuations and key comovements including the correlation between hours and labor productivity despite its simplicity the model offers an answer to the persistence problem chari et al 2000 that does not rely on multiple frictions and adjustment lags or ad hoc backward looking components we conclude modern dsge models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles

a comment on the economics of labor adjustment mind the gap reply in earlier contributions ricardo j caballero and eduardo m r a engel 1993 hereafter ce and caballero et al 1997 hereafter ceh investigate labor dynamics using a methodology which postulates that employment changes depend on a gap between the actual and target levels of employment both studies find evidence of nonlinearities in aggregate timeseries data employment growth depends on the cross sectional distribution of employment gaps this finding is taken as evidence that nonlinear adjustment at the microeconomic level matters for aggregate time series this is important for business cycle and policy analysis as it implies macroeconomics must take the cross sectional distribution of employment gaps into account this paper questions the methodology and thus the conclusions of these studies we argue that these reported aggregate nonlinearities may be the consequence of mismeasurement of the gap rather than nonlinearities in plant level adjustment both ce and ceh rely upon a hypothesis that employment growth responds to a gap z between the desired and actual number of workers at a plant the advantage to the gap approach is that the choice of employment an inherently difficult dynamic optimization problem is characterized through a nonlinear relationship between and z that is the adjustment rate z is postulated to be a nonlinear function of z however there is no free lunch the desired number of workers and hence the employment gap is unobservable thus in order to confront data this approach needs an auxiliary theory to infer z from observed variables both ce and ceh use observed hours variations to infer the employment gap this inference is one element of our critique of the gap methodology to assess this methodology we simulate data from the solution of a dynamic model of labor adjustment assuming quadratic adjustment cooper department of economics university of texas austin tx 78712 e mail cooper eco utexas edu willis research department federal reserve bank of kansas city kansas city mo 64198 e mail jonathan willis kc frb org we are grateful to seminar participants at boston university emory university the university of british columbia the federal reserve bank of boston the university of haifa the university of iowa the university of michigan the university of pennsylvania the university of texas at austin the 2002 nber ef meeting and the 2000 cmsg conference at mcmaster university for comments and suggestions discussions with eduardo engel john haltiwanger daniel hamermesh peter klenow and christopher ragan were much appreciated the authors thank the nsf for financial support we also appreciate comments from the referees cooper thanks the federal reserve bank of minneapolis for its hospitality during revisions of this manuscript the views expressed herein are solely those of the authors and do not necessarily reflect the views of the federal reserve bank of kansas city the federal reserve bank of minneapolis or the federal reserve system 1 daniel hamermesh 1989 uses a gap methodology as well but does not adopt the approach of estimating a nonlinear hazard function explained below to infer the nature of adjustment costs hence we focus on ce and ceh in this discussion of methodology 2 we do not contest the general view of nonlinear employment adjustment at the plant level this finding is consistent with other evidence that points to inactivity as well as bursts of employment adjustment at the plant level for example hamermesh 1989 provides a revealing discussion of lumpy labor adjustment at a set of manufacturing plants steven davis and john haltiwanger 1992 document large employment changes at the plant level ceh also report evidence of inactivity in plant level employment adjustment there seems little doubt that an explanation of plant level employment dynamics requires a model of adjustment that is richer than the quadratic adjustment cost structure and includes some forms of nondifferentiability and or nonconvexity 3 as the gap approach is used in numerous other applications capital adjustment durable adjustment price adjustment to approximate the solution to dynamic optimization problems our concerns may be relevant for those exercises as well

investment dynamics with fixed capital adjustment cost and capital market imperfections this paper examines the implications of financing frictions on capital stocks and on capital accumulation in the presence of non convex costs of adjusting the capital stock in this setup finance has an influence on both the level of capital and the timing of investment finance and productivity are complements and finance influences investment the strongest when firms wish to significantly adjust capital for fundamental reasons these theoretical considerations are confronted with uk data while finance is mostly irrelevant for long term capital decision the short run investment function shows a significant impact of finance which is also strongest for strong fundamental investment incentives

are combination gas and electric utilities multiproduct natural monopolies gas and electric services are provided in some locations by a single firm in others by two firms the loss of competition inherent in single firm provision can be justified by the presence of both economies of scope and product specific economies of scale for each output in multiproduct production the estimation of a multiproduct hybrid translog cost function shows no evidence of such economies at the mean combination utility output vector copyright 1987 by mit press

a multiproduct cost study of savings and loans this paper investigates the cost structure of savings and loans most studies of financial institutions have failed to take into account the multiproduct nature of these institutions using the multiproduct approach the existence of subadditivity multiproduct global and product specific economies of scale and scope and substitutability between inputs is investigated a translogarithmic cost function is estimated using 1982 data on california savings and loans restrictive functional forms also estimated are rejected standard errors for the statistics calculated are estimated and various statistical tests are conducted previous authors have not calculated standard errors for these statistics no evidence of subadditivity in the industry is found in order to investigate the impact of deregulation on the financial services industry it is necessary to know the cost structure of the industry optimal firm size and product mix can be determined once the structure is known the presence of scale economies would imply that smaller firms or entering firms that operate at a small scale would be at a cost disadvantage compared with larger established firms a finding of economies of scope i e economies of joint production would imply that firms that were specialized would be at a cost disadvantage and that regulations that restrict the outputs a firm is allowed to produce may lead to inefficient production

an empirical study of joint production and scale economies in commercial banking this paper utilizes the translog cost function to test the proposition that the bank productionfunction is characterized by jointness the cross section analysis for the years 1973 through 1978 indicates that bank production is in fact characterized by jointness this result calls into question the findings and implications of studies that utilize the assumption of non jointness in production since virtually all of the major bank cost studies employ the assumption of nonjointness the second part of our analysis examines scale economies for the banking firm while allowing for jointness in production our estimates indicate that scale economies characterize bank production at only small bank sizes and that the cost structure of large banks is characterized by diseconomies of scale

estimating a new keynesian phillips curve with a corrected measure of real marginal cost evidence in japan we estimate a new keynesian phillips curve nkpc in japan focusing on the measurement of real marginal cost rmc especially we correct labor share by taking account of two kinds of labor market frictions i labor adjustment costs and ii real wage rigidity our results show that the consideration of these labor market frictions greatly improves the fit of japan s nkpc furthermore if we additionally incorporate materials prices in the calculation of rmc then the fit of the nkpc is further improved our most important finding is that the conventional backward looking component is no more needed to explain japan s inflation dynamics if we use a corrected measure of rmc

a comment on the economics of labor adjustment mind the gap rejoinder numerous papers in this literature have used these questions as motivation understanding the structure of labor adjustment costs is relevant any time a policy or forecasting question requires input on the properties of labor dynamics of course for some policy questions we are interested in the aggregate effects of policies hence understanding whether nonconvexities have implications for aggregate labor demand is crucial as well in terms of the ongoing discussion over these questions there seems to be agreement that the simple quadratic adjustment cost model is not an adequate representation of the costs plants face in adjusting the number of workers from data displayed by daniel hamermesh 1989 and caballero et al 1997 hereafter ceh one is certainly struck by both the inactivity of labor adjustment and the bursts of job creation and destruction at the plant level that said while these observations serve as evidence against a model which contains only quadratic adjustment costs they do not directly identify a particular structure of adjustment costs at the plant level inspection of the adjustment patterns reported in ceh though cast in terms of gaps does provide some evidence of partial adjustment and thus suggests the presence of both convex and nonconvex adjustment costs further caballero and engel 1993 hereafter ce and ceh appear to have provided useful evidence on the second question the nonlinearities they uncover in aggregated data suggest that nonconvexities at the plant level have aggregate implications

cross country comparisons of efficiency evidence from the uk and italian investment firms abstract this paper compares and reconciles two new methods for cross country comparisons of the cost efficiency of uk and italian investment firms over the period 1995 1998 it employs four different specifications of the stochastic frontier methodology using a translog cost function in order to measure x efficiency the traditional common frontier reveals that italian investment firms are nearly as efficient as uk firms to overcome traditional limitations two methods are used in this paper they provide consistent results the first method shows differences between the efficiency of the two countries by incorporating environmental variables into the cross country common frontier the second method shows differences in the efficiency of the domestic versus foreign investment firms in the two countries by testing the ability to monitor and control on a cross border basis finally to identify investment firms that are both cost and profit efficient we undertake a profitability test

microeconomic adjustment hazards and aggregate dynamics the basic premise of this paper is that understanding aggregate dynamics requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive we provide a general characterization of lumpy behavior at the microeconomic level in terms of an adjustment hazard function which relates the probability that a unit adjusts to the deviation of its state variable from its moving target we characterize rich cross sectionally dependent aggregate dynamics generated by nonconstant hazards we present an example based on u s manufacturing employment and job flows and find that increasinghazard models outperform constant hazard partial adjustment models in describing aggregate employment dynamics

labor demand and the structure of adjustment costs this study examines the costs firms face in adjusting labor demand to exogenous shocks evidence on monthly plant level data shows that adjustment proceeds in jumps employment is unchanged in response to small shocks but moves instantaneously to a new equilibrium if the shocks are large results in the large literature that assumes smooth adjustment are due to aggregation of this nonlinear relation the finding has implications for cyclical changes in productivity for severance pay layoff and plant closing restrictions and for all other policies that affect the cost of adjusting employment copyright 1989 by american economic association

aggregate employment dynamics building from microeconomic evidence this paper studies quarterly employment flows of approximately 10 000 u s manufacturing establishments the authors use establishments hours week to construct measures of the deviation between desired and actual employment and use these as the establishments main state variables the main findings are 1 microeconomic adjustment functions are nonlinear with plants adjusting disproportionately to large shortages 2 adjustments are often either large or nil suggesting the presence of nonconvexities in the adjustment cost technologies 3 the bulk of average employment fluctuations is accounted for by aggregate rather than reallocation shocks and 4 microeconomic nonlinearities amplify the impact of large aggregate shocks copyright 1997 by american economic association

the efficiency effects of a single market for financial services in europe abstract this paper examines the potential efficiency effects of a single market for financial services in europe the topics covered include universal banking the merger and acquisition process itself cross border ownership and management of financial institutions and the effects of consolidation of financial institutions on the supply of relationship lending services to informationally opaque small businesses the research reviewed here suggests that the creation of a single market for the european financial services industry is not likely to bring about strong efficiency gains and that cross border efficiency barriers may prevent the single market from becoming a reality