how do nonprofits respond to negative wealth shocks the impact of the 2008 stock market collapse on hospitals the theory of cost shifting posits that nonprofit firms share the pain of negative financial shocks with their stakeholders for example by raising prices we examine how nonprofit hospitals responded to the sharp reductions in their assets caused by the 2008 stock market collapse the average hospital did not raise prices but hospitals with substantial market power did cost shift in this way we find no evidence that hospitals reduced treatment costs hospitals eliminated but left unchanged their offerings of profitable services taken together our results provide mixed evidence on whether nonprofits behave differently from for profits

efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

x efficiency in australian banking an empirical investigation this paper empirically investigates the x eaciency technical and allocative in australian banks a non parametric method of data envelopment analysis dea has been used to arrive at the eaciency scores banks in this sample were found to have low levels of overall eaciency compared with the banks in the european countries and in the us the results indicate that as a source of overall ineaciency the technical component was more important than the allocative component thus the ineaciency in australian banks can be attributed to wasting of inputs technical ineaciency rather than choosing the incorrect input combinations allocative ineaciency domestic banks were found to be more eacient than foreign owned banks the study has important implications such as guiding the government policy regarding deregulation and mergers since the study pinpoints the sources of ineaciency it would also help banks with strategic planning 2001 elsevier science b v all rights reserved

banking technology and the existence of a consistent output aggregate abstract this paper addresses the question of the existence of a consistent output aggregate in banking specific necessary and sufficient conditions for output aggregation are developed and tested in the context of a second order approximation to any arbitrary multi product bank cost function the analysis provides evidence that a composite aggregate measure of output fails to provide a proper representation of banking technology and therefore previous studies that used aggregate output measures may well be subject to specification errors

financial firm production of monetary services a generalized symmetric baroett variable profit function approach an alternative monetary production model of financial firms is employed to investigate supply side monetary aggregation financial firms are conceived to produce monetary services as outputs through financial intermediation a new method for testing the existence of consistent monetary output aggregates in financial firms production technology is developed in terms of a multiproduct firm s variable profit function and the method does not require homotheticity of the aggregator function we use a generalized symmetric barnett flexible functional form that specification satisfies global curvature conditions and retains its flexibility under the null hypothesis of weak separability neither of those properties is possessed by other flexible functional forms

banking costs generalized functional forms and estimation of economies of scale and scope recently researchers have claimed that the primitive cobb douglas production technology captures banking cost functions adequately these findings rule out scope economies and u shaped cost curves the rejection of the generalized flexible form postulated by the above authors is a necessary but not a sufficient condition to justify a cobb douglas specification using restricted generalized functional forms the authors find that the composite output cobb douglas specification is an inadequate description of banking cost technology translog specifications with multiple products capture the data best suggesting the presence of both scope and scale economies copyright 1989 by ohio state university press

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

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

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

default and punishment in general equilibrium we extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools the equilibrating variables include expected delivery rates along with the usual prices of assets and commodities by reinterpreting the variables our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive general equilibrium framework perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates it also makes for a simple equilibrium refinement which we propose in order to rule out irrational pessimism about deliveries of untraded assets we show that refined equilibrium always exists in our model and that default in conjunction with refinement opens the door to a theory of endogenous assets the market chooses the promises default penalties and quantity constraints of actively traded assets

antitrust treatment of nonprofits should hospitals receive special care nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for profit hospitals because suppression of competition may also allow nonprofits to cross subsidize care for the poor using detailed california data we find no evidence that nonprofit hospitals are more likely than for profit hospitals to provide more charity care or offer unprofitable services in response to an increase in market power therefore we find no empirical justification for applying as some courts have suggested different antitrust standards for nonprofit hospitals jel i11 l1 l44

retrospectives x efficiency in a 1966 article in the american economic review harvey leibenstein introduced the concept of x efficiency the gap between ideal allocative efficiency and actually existing efficiency leibenstein insisted that absent strong competitive pressure firms are unlikely to use their resources efficiently and he suggested that x efficiency is pervasive leibenstein of course was attacking a fundamental economic assumption that firms minimize costs the x efficiency article created a firestorm of criticism at the forefront of leibenstein s powerful critics was george stigler who was very protective of classical price theory in terms of rhetorical success stigler s combination of brilliance and bluster mostly carried the day while leibenstein s response to stigler was well reasoned it never resonated with many economists and leibenstein remains undeservedly underappreciated leibenstein s challenge is as relevant today as it ever was

measuring economies of diversification a frontier approach the purpose of this article is to improve the statistical analysis of multiproduct firm behavior specifically we are interested in modeling and estimating multiproduct technology focusing on size and product line variation thus we offer a new empirical technique that can be used to directly analyze issues such as subadditivity expansion path subadditivity economies of scope and economies of diversification although applied papers employ a wide variety of theoretical multiproduct cost concepts previous work uses nonfrontier estimation techniques we show how to introduce frontier approaches to multiproduct cost analysis that can be applied to any of these concepts and improve the statistical analysis specifically we introduce an empirical test using frontier techniques that allows for direct measures of economies of diversification at the firm specific level

how do banks respond to shocks a dynamic model of deposit taking institutions abstract this paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process interbank lending borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices the bank smooths the impact of interest rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans it does not however provide insurance against negative shocks of real origin that increase its expected default costs the predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry

an empirical analysis of scale and scope economies and technical change in an irish multiproduct banking firm abstract in contrast to most empirical investigations of the efficiency of multiproduct financial institutions which either estimate scale and scope economies with a given state of technology or only analyse technical change in the presence of overall scale economies this study estimates overall scale economies product specific scale economies and scope economies in the presence of both neutral and non neutral technical change also in contrast to most other empirical studies in this area standard errors are computed for all relevant statistics the findings indicate diseconomies of scope overall diseconomies of scale product specific economies are decreasing for investments and increasing for loans in addition to substantial neutral technical change biased technical change is labour and capital saving and deposits using in character

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

an evolutionary analysis of insurance markets with adverse selection abstract the equilibrium nonexistence problem in rothschild and stiglitz s insurance market is reexamined in a dynamic setting insurance firms are boundedly rational and offer menus of insurance contracts which are periodically revised profitable competitors contracts are imitated and loss making contracts are withdrawn occasionally a firm experiments by withdrawing or innovating a random set of contracts we show that rothschild and stiglitz s candidate competitive equilibrium contracts constitute the unique long run market outcome if innovation experiments are restricted to contracts which are sufficiently similar to those currently on the market

three sides of harberger triangles prevailing economic wisdom is highly critical of injudicious tax policies or government regulations uncorrected externalities unchecked monopolistic practices and various other market failures when economists are challenged to quantify the economic costs of associated price distortions it is standard practice and has been since the 1960s to use a small number of assumptions and selected elasticities to estimate areas of the relevant harberger triangles this simple and straightforward exercise has numerous applications and the virtue of producing answers rather than conjectures harberger triangles come in many shapes and sizes figure 1 offers an illustration of such a triangle for the simple case of an excise tax point a of figure 1 at which the demand and supply schedules intersect denotes market equilibrium in the absence of the tax with quantity q1 transacted at price p1 introduction of an excise tax at rate t payable by firms selling the commodity shifts the supply schedule upward by t at the new market equilibrium firms sell q2 units of the commodity at a market price of p2 receiving after tax p3 a p2 0 t market equilibrium at point a in figure 1 has the feature that marginal consumption benefits equal marginal production costs the excise tax drives a wedge between marginal benefits and marginal costs at consumption level q2 consumers are willing to pay any amount up to p2 for additional units of the good and suppliers would readily provide additional units of the good for any price of p3 or greater but these additional transactions do not take place due to the effect of the tax wedge the loss associated

maturity intermediation and intertemporal lending policies of financial intermediaries this paper considers the maturity intermediation and intertemporal lending decisions of risk averse financial intermediaries in particular the maturity mismatch problem and the fixed versus variable rate lending decision are modeled when the major source of risk involves uncertain future interest rates the results imply that the strategy of matching the maturity of assets and liabilities is not generally optimal or even minimum risk this is due primarily to the built in hedge that the intermediary has as a result of rolling over short term loans while continuing to finance long term loans intertemporal dependencies between loan demand and costs or both also have an effect on the optimal degree of maturity mismatching and provide one rationale for making loans at rates below current marginal cost

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

multiproduct technology and market structure a recent line of research has exposed some technological determinants of the structure of industries that produce more than one good the analyses of both multiproduct perfect competition and natural monopoly require a generalized notion of average cost and in addition several newly identified technological characteristics pertinent only to joint production this paper provides an overview of these new results and suggests a unifying framework in which the theory can be further developed

the role of fixed costs and cost complementarities in determining scope economies and the cost of narrow banking proposals narrow banking proposals would separate insured deposits from most types of bank lending using data from large u s banks the authors examine the extent to which narrow banking proposals are likely to result in increased production costs production costs will rise for nonjoint provision of deposit and loan services if there are cost complementarities in producing the two outputs jointly or if joint production enables banks to spread their fixed costs more effectively unlike standard cost function approaches the authors methods allow them to estimate the fixed cost and cost complementarity effects separately they find the net production cost consequences of narrow banking to be negligible copyright 1993 by university of chicago press

economies of scale in building societies this paper presents new measurements of economies of scale in the building society industry by estimating a translog total cost function jointly with the derived input cost share equations it differs from previous building society studies by defining total cost to include the interest cost of borrowed funds as well as the operating costs of employing labour and capital services in addition to the usual elasticity three further scale economy measures are developed and estimated input specific economies of scale augmented economies of scale and augmented input specific economies of scale

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

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

cost structure and technical change in rural banking abstract using the multi product translog cost function this paper examines the cost structure and technical change occurring within the novel ghanaian rural banks the results of the seemingly unrelated error components model indicate substantial unexploited economies of scale in individual products as well as in overall intermediation there is presence of pairwise complementarity between loans and government securities and between deposits and government securities but absence of pairwise complementarity between loans and deposits overall capital using and labour saving technical change has occurred but efficiency loss in deposit mobilization outweighs the efficiency gains in government securities and lending activities operation of agencies reinforces the overall efficiency loss the rural banks must not be hindered from expanding but in any growth strategy deposit mobilization should take a central position and the cost of operating agencies watched closely

a study on long run inefficiency levels of a panel dynamic cost frontier under the framework of forward looking rational expectations abstract this paper aims to provide a theoretical underpinning of the dynamic efficiency model pioneered by ahn s c good d h sickles r c 2000 estimation of long run inefficiency levels a dynamic frontier approach econometric reviews 19 461 492 in the context of a quadratic loss function this paper formulates a multi period forward looking rational expectations model on the evolution of the technical inefficiency level which correctly produces a dynamic panel data model the model is illustrated using panel data of 112 french banks encouraging evidence of superiority in favor of the model is reached substantial cost inefficiency prevails in this industry where the constituent banks are characterized as having volatile adjustment speeds toward their long run steady states the sample banks exhibit increasing returns to scale and product mix economies

the technical efficiency of us banks abstract the paper uses a non parametric frontier approach to measure the technical efficiency of a sample of u s banks the results indicate that these banks could have produced the same level of output with only 70 of the inputs actually used in addition most of this inefficiency is due to pure technical inefficiency wasting inputs rather than scale inefficiency operating at non constant returns to scale finally regression analysis indicates that the technical efficiency of the banks is positively related to size negatively related to product diversity and not at all related to the extent to which branch banking is allowed

banks as multioutput oligopolies an empirical evaluation of the retail and corporate banking markets the distinction between retail and corporate banking markets is of much importance in real life banking organizations the two markets differ with respect to concentration the importance of informational asymmetries and the extent of customer mobility within a standard conjectural variation model estimated on cost efficient banks as well as on the full sample of banks the authors empirically characterize the strategic behavior in each of these markets and also focus on cross market interactions to see whether initial moves in one market affect the equilibrium in the other market they compare their findings to the predictions that would follow from merely considering concentration ratios such as the herfindahl index

product line deregulation and the cost structure of us savings and loan associations recent legislative actions restrict thrift powers which were broadened by deregulatory actions in the early 1980s using nationwide data for savings and loans s ls evidence is found that these restrictions may rise intermediation costs for s ls by limiting their ability to exploit economies of scope between mortgage related and other outputs in addition economies of scale for a wide size range of s ls are found evidence is also found to suggest that insolvent s ls have higher costs for the same level of outputs than solvent s ls

acquisition targets and motives the case of the banking industry findings do not indicate poorly managed firms are more likely to be acquired than well managed firms the analysis uses a sample of 1 046texas banks that existed in 1970 out of which 201 were acqui red during the period 1970 82 a multinomial logit procedure is used to estimate the relationship between the likelihood of acquisition and the characteristics of the target firm and its market additional results suggest that firms with la rge market shares low capital asset ratios and operations in urban areas are r elatively likely to be acquired but not firms with low profits or low growth copyright 1987 by mit press

market equilibrium with hidden knowledge and self selection the problem of the existence of a competitive equilibrium in models with hidden knowledge and self knowledge has been discussed previously by m rothschild and j e stiglitz 1976 c a wilson 1977 and j g riley 1979 recent analyses of such models by i cho and d kreps 1986 and riley argue for a particular outcome the pareto dominant separating zero profit one the authors prove the existence of such an outcome under very general conditions and generalizing the reactive equilibrium concept introduced by riley they prove this outcome is the unique reactive equilibrium copyright 1987 by the econometric society

economies of superscale in commercial banking most previous studies of scale economies in banking have excluded banks larger than 1 billion in assets thus study by contrast estimates cost functions for the 100 largest us commercial banks hedonic terms are incorporated to correct for the aggregated nature of the call report data available for these banks in addition we attempt to quantify the cost benefit of diversification in the model we estimate efficient bank scale to range from 15 billion to 37 billion in total assets a thousandfold increase over some previous findings these results are supported by comparison of actual average costs as well as by casual historical observation and the level of widespread concern over interstate banking our findings suggest some cost incentive or benefit to expansion or consolidation among large regional banks including interstate expansion or consolidation

scale elasticity versus scale efficiency in banking in the early bank cost literature many of the studies found scale elasticities significantly different from unity as a result the authors suggested that changes in industry structure could produce cost savings through increased efficiency recent bank cost studies improved upon previous methodologies by utilizing flexible functional forms accounting for multiproduct production processes estimating scale measures at both the branch and firm level distinguishing between branch and unit bank technologies resulting from regulatory restrictions etc the typical finding from the recent studies is that relatively minor scale economies exist in banking since the scale elasticity measure differs little from a value of unity this reported finding is usually followed by a general statement that banks operate relatively efficiently with respect to the scale of production and that the potential cost gains from exploiting scale advantages via merger or growth activities appear to be relatively minor the implication from the conclusions drawn by the authors of numerous studies is that scale elasticity and scale efficiency are essentially synonymous the derivation of one automatically provides an accurate or approximate value for the other the purpose of this article is to bring attention to a common confusion in the literature between two relatively straightforward concepts scale elasticity and scale efficiency the bank production process is one of the most extensively researched aspects of bank behavior until recently however studies have not typically evaluated scale efficiency instead scale elasticity estimates have been used as a proxy for efficiency and elasticity measures close to 1 0 are taken to imply that scale inefficiency is trivial scale inefficiency is typically assumed to be linearly

hospital ownership and public medical spending the hospital market is served by firms that are private for profit private not for profit and government owned and operated i use a plausibly exogenous change in hospital financing that was intended to improve medical care for the poor to test three theories of organizational behavior i find that the critical difference between the three types of hospitals is caused by the soft budget constraint of government owned institutions the decision makers in private not for profit hospitals are just as responsive to financial incentives and are no more altruistic than their counterparts in profit maximizing facilities my final set of results suggests that the significant increase in public medical spending examined in this paper has not improved health outcomes for the indigent i introduction the hospital market is served by firms that are private for profit private not for profit and publicly owned and operated in this paper i examine how a hospital s type of ownership influences its response to profitable opportunities that are created by changes in government policy the policy change that i exploit was designed to improve the quality of medical care for lowincome individuals by significantly increasing hospitals financial incentives to treat them this program also substantially increased the revenues of those hospitals that had been serving a disproportionate share of the indigent i use this plausibly exogenous change in government policy to test three different theories of organizational behavior and then to assess the impact of hospital behavioral responses on health outcomes the response of organizations to changes in government policy will have an important impact on the consequences of these policies this is likely to be especially true in the medical sector in which the federal state and local governments contract directly

collusion efficiency and pricing behavior evidence from the banking industry this paper examines the validity of competing hypotheses used to explain the observed positive relationship between concentration and profits using price proxies from the banking industry we find that leading secondary firms in a market act as price setters price takers this is true regardless of market concentration we interpret this as evidence of the superior efficiency of leading firms and conclude that the higher profits earned by these firms is due to their superior efficiency and not collusive behavior

a game theoretic foundation of competitive equilibria with adverse selection equilibria with adverse selection we construct a fully specified extensive form game that captures competitive markets with adverse selection in particular it allows firms to offer any finite set of contracts so that cross subsidization is not ruled out moreover firms can withdraw from the market after initial contract offers have been observed we show that a subgame perfect equilibrium always exists and that in fact when withdrawal is costless the set of subgame perfect equilibrium outcomes may correspond to the entire set of feasible contracts we then focus on robust equilibria that exist both when withdrawal costs are zero and when they are arbitrarily small but strictly positive we show that the miyazaki wilson contracts are the unique robust equilibrium outcome of our game this outcome is always constrained efficient and involves cross subsidization from low to high risk agents that is increasing in the share of low risks in the population under weak conditions on risk preferences

neutrally optimal mechanism under adverse selection the canonical insurance problem abstract this paper revisits the problem of adverse selection in the insurance market of rothschild and stiglitz 1976 we extend the three stage game in hellwig 1987 by allowing firms to endogenously choose whether or not to pre commit on their contractual offers menus we show how this mechanism can deliver the miyazaki wilson spence allocation as the unique perfect bayesian equilibrium this allocation is the unique incentive efficient and individually rational maximizer of the utility of the most profitable type in fact given that the informed player has only two types it is the unique core allocation and thus the unique neutral optimum in the sense of myerson 1983

efficient competitive equilibria with adverse selection do walrasian markets function orderly in the presence of adverse selection in particular is their outcome efficient when exclusive contracts are enforceable this paper addresses these questions in the context of a rothschild stiglitz insurance economy we identify an externality associated with the presence of adverse selection as a special form of consumption externality consequently we show that competitive equilibria always exist but are not typically incentive efficient however as markets for pollution rights can internalize environmental externalities markets for consumption rights can be designed to internalize the consumption externality due to adverse selection with such markets competitive equilibria exist and incentive constrained versions of the first and second welfare theorems hold

estimation and identification of merger effects an application to hospital mergers abstract existing empirical estimates of merger effects are compromised by the fact that merging and nonmerging entities differ in unobserved ways that independently affect outcomes of interest to obtain an unbiased estimate of the effect of consummated mergers i propose an approach that focuses on the response of rivals to mergers and accounts for the endogeneity of exposure to these mergers i apply this approach to evaluate the impact of independent hospital mergers in the united states between 1989 and 1996 using the physical colocation of rivals as an instrument for whether they merge i find a sizeable one time increase in price following a rival s merger with the greatest increase occurring among hospitals nearest the merging hospitals these results are more consistent with predictions from structural models of the hospital industry than with prior observational estimates of the effects of hospital mergers

an examination of cost structure and production performance of commercial banks in singapore abstract this paper uses a parametric approach in the framework of a translog cost function and a non parametric approach in the framework of linear programming to examine production performance and cost structure of a sample of singaporean commercial banks the results of the parametric methodology suggest that the average cost curve of these banks is u shaped and there are economies of scale for small and medium size banks further analysis provides evidence of economies of scope for all banks regardless of their size the non parametric results indicate that the singaporean banks could have reduced cost by 43 had they all been overall efficient the sources of this cost inefficiency seem to be caused equally by allocative and technical inefficiencies

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

on the mutuality of interest between bureaus and high demand review committees the case of joint production if we combine my result with those of niskanen and mackay weaver we have three necessary conditions for interests to be mutual first review committees are composed of high demanders of their bureau s outputs the committee seeks to maximize the interests of the group it represents subject to majority approval of the full legislature second the ideal point of the committee must not be too extreme in terms of mix finally the multiproduct bureau must be the least cost institution for public supply of the services in the sense that joint production is efficient for the review committee interested in two or more outputs if any of these does not hold the interests of the bureau and its review committee diverge the incentives for the bureau to expand across outputs without regard to efficiency means that in general we could expect the bureau to perceive the review committee as an adversary because for the committee efficiency in production is an important consideration what are the implications of this result there must exist an optimal structure for bureaucratic production of services further there exist substantial incentives for discovering and implementing this structure when legislators create bureaus diseconomies of scope imply separate bureaus are better economies of scope the opposite if committees optimally structure the bureaucracy in accordance with this result they ensure that interests do not diverge so we see that the initial design of bureaucratic organization may be more important than was previously recognized and calls for closer examination

pricing by non profit institutions the case of hospital cost shifting abstract this paper shows that a hospital whose objective function includes output as well as profits may raise price to private paying patients in response to cuts in the price it receives for madicaid or medicaid patients evidence is presented to show that hospitals in illinois cost shifted in this manner in response to substantial reductions in medicaid payments in the early 1980s as private sector pricing becomes more competitive however the ability and willingness of hospitals to cost shift will wane

bank regulation and monetary policy the depository institutions deregulation and monetary control act 1980 and the garn st germain depository institutions act 1982 are the two most significant pieces of bank legislation since the 193os their significance stems from the fact that they have sought to roll back a number of the regulations and restrictions imposed on bank activity and competition in the 1933 80 period among the important provisions of these acts are a gradual elimination of regulation q ceilings on time and savings deposits by march 1986 the amelioration of state imposed usury ceilings on loans the nationwide provision of interest bearing transaction type accounts negotiable order of withdrawal now and super now accounts permission for thritts to expand into bank like products such as commercial and industrial loans consumer loans and credit cards and the development of new types of savings accounts such as mmdas l in addition to legislative deregulation we have also witnessed homemade deregulation as banks have sought to exploit often with great success loopholes in the bank holding

the structure of technology in a multioutput branch banking firm we formulate and estimate a multioutput bank s cost function amenable for distinguishing between economies of scale and economies of network density we find significant returns to network density especially for smaller banks diseconomies of scale are found for the larger banks whereas the hypothesis of constant returns to scale could not be rejected for the smaller banks

technical change organizational form and the structure of bank production of those technological characteristics related to the nature of competition among firms in an industry or market scale economies and technical change are especially important economies of scale are said to exist when an equiproportional increase in all inputs results in a greater than proportional increase in output or equivalently when an increase in output at constant input prices leads to a less than proportional increase in total costs thus average costs decline as output expands depending upon the extent to which costs decline as output increases regulation of the firms in the industry may be necessary l the literature analyzing scale economies in commercial banking is voluminous the early studies on scale economies in banking include those by benston 1965 1972 greenbaum 1967 murphy 1972 and bell and murphy 1968 more recent studies include those by benston hanweck and humphrey 1982 and clark 1984 2 this literature has established that mild scale economies exist in bank

technical scale and allocative efficiencies in u s banking an empirical investigation a nonparametric frontier approach is used to calculate the overall technical pure technical allocative and scale efficiencies for a sample of 322 independent banks the sample was drawn from the federal deposit insurance corporation tapes on the reports of condition and reports of income call reports for the year 1986 the results indicated a low level of overall efficiency the main source of inefficiency was technical in nature rather than allocative separate efficiency frontiers were constructed to test the effect of branching however the distributions of efficiency measures for branching and non branching banks were not found to be different

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

changes in the cost of intermediation the case of savings and loans the minimum cost output configuration for a firm may change as the result of a variety of factors including changes in market structure in this paper we test this structural change hypothesis with savings and loan data we find support for the hypothesis that separable constant returns to scale production functions characterize the average savings and loan in our sample in 1983 this is in contrast to the cost complementarities found in 1978 we argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production it seems reasonable to assume that the cost minimizing configuration of a multiproduct firm is potentially subject to nonstationarity during periods of structural change in input and or output markets the late 1970s and early 1980s represent such a period of turbulence for many markets in the financial services industry volatile interest rates combined with technological and regulatory changes may have caused firms in this industry to alter their output mixes in an effort to capture cost complementarities from joint production the purpose of this paper is to test this hypothesis of structural change in the savings and loan industry using both a translog and minflex laurent translog mlt specification of the production function we have chosen to investigate savings and loans s ls during the late 1970s and early 1980s for two reasons first s ls provide an ideal vehicle for testing our hypothesis because they were restricted almost exclusively to mortgages and securities as outputs before the passage of the depository institutions deregulation and monetary control act of 1980 and the garn st germain act of 1982 moreover there were also market changes with respect to both the pricing and mix of inputs i e deposits our second rationale involves the fact that there is a large and growing body of literature in the area of what is now called the

mergers and technical efficiency in spanish savings banks a stochastic distance function approach abstract the aim of this paper is to test the temporal variation of technical efficiency of spanish savings banks during the period 1985 1998 furthermore we test whether merged and non merged firms have different levels and temporal patterns of technical efficiency a stochastic output distance function r w shephard theory of cost and production functions princeton university press princeton nj is employed to accommodate multiple output technology the distance function provides the advantage that it does not need information about prices so it can accommodate the multi product nature of the financial sector only using the quantities as data an important point when the assumptions about perfectly competitive markets are unlikely to be met the temporal variation of efficiency is modeled extending the battese and coelli journal of productivity analysis 3 1992 153 169 approach in two ways relaxing the monotonicity of the temporal variation pattern of the efficiency term and allowing for different patterns of efficiency change between merged and non merged firms

evaluating the cost efficiency of the italian banking system what can be learned from the joint application of parametric and non parametric techniques abstract research on bank efficiency has developed in two separate streams econometric studies and data envelopment analysis a linear programming technique these two branches of literature have developed quickly but separately in this paper these two approaches have been tested on a common panel of 270 italian banks and this has suggested the following i econometric and linear programming results do not differ dramatically when based on the same data and conceptual framework ii when differences arise they can be explained by going back to the intrinsic features of the models moreover some findings on italian banks may be of interest also to the international reader i efficiency scores show a high variance ii the banking system is split in two between northern and southern banks iii there is a direct rather than inverse relationship between productive efficiency and asset quality iv the efficiency of italian banks did not increase over the period 1988 1992

nash equilibrium in competitive insurance i formalize a rather stylized insurance market with adverse selection as a standard duopoly i formally specify demand functions and profits and prove that a nash equilibrium in pure strategies exists if and only if the well known rothschild stiglitz allocation is efficient

is cost cutting evidence of x inefficiency x inefficiency is surely among the most important topics in microeconomics yet economists have found it difficult to study if a given level of x inefficiency were inevitable and changeless it would be of little interest indeed would not really deserve to be called xinefficiency at all thus our attention should focus on actual and potential changes in xinefficiency that is on causes of changes internal to a firm that shift the firm s cost function we explore the use of firms costcutting announcements to study the causes of changes in x inefficiency cost cutting announcements by large corporations are made frequently and are reported in the business press one might be tempted to interpret these announcements as indicating efforts to reduce x inefficiency and indeed we think that a substantial number of them are just that our discussions with managers confirm that finding and trimming fat within the corporation is an important yet somewhat intermittent activity it is also clear however that not all costcutting announcements concern x inefficiency some perhaps many may instead be reoptimizing input and or output quantity responses to changes in exogenous factors such as the prices of inputs or outputs the announcements seldom make it clear whether the activity is reoptimization or fat trimming we aim to explore the existence and nature of fat trimming within a firm and how one might distinguish this from normal reoptimization in particular we seek evidence bearing on a central hypothesis in the informal theory of xinefficiency harvey leibenstein 1966 with very broad support in news reports in popular belief and in our interviews with managers this fat hypothesis is that a firm is most apt to cut costs to reduce x inefficiency when it is under financial pressure this hypothesis if correct has implications both for firm strategy and for competition policy while olivier blanchard et al 1994 studied the effects of idiosyncratic cash shocks it seems desirable to find a more systematic source of wealth shocks one such source is exogenous changes in the prices of competitively supplied inputs or outputs in borenstein and farrell 1999 however we explain that not only must the price changes be out of the firm s control they must also leave the firm s production possibilities unchanged for instance if the price of oil increases due to political instability that raises the expected profits of u s oil companies on the oil they will be able to sell in any case but it might simultaneously indicate reduced opportunity to explore for oil in the future likewise if the technology for gold mining improved the price of gold would fall but the availability of the new technology to firms under study would offset the price change and could result in a net positive wealth shock and increase their optimal production quantities one might assess the source of price changes by examining quantity changes potentially differentiating between supply and demand shocks news reports or the technology involved drawing inferences from cost cutting announcements faces another problem because a price shock that say lowers the firm s overall profitability is likely also to lower its marginal borenstein haas school of business university of california berkeley ca 94720 1900 and nber e mail borenste haas berkeley edu farrell department of economics university of california berkeley ca 94720 3880 e mail farrell econ berkeley edu for research support we are grateful to the alfred p sloan foundation via a grant to the industrial technology and productivity project of the national bureau of economic research erin mansur david o neill and evan rose provided outstanding research assistance we thank many managers in the goldmining and oil industries for discussing cost cutting with us 1 there are other data problems including the following i the division s in which the cost cutting is to occur are usually not precisely reported ii magnitudes are not systematically reported and usually are projections and iii multiple reports of a single cost cutting effort sometimes months apart are common

international comparison of bank production characteristics and technological change in this paper we conduct an international comparison of bank production and technological characteristics the comparison is performed using novel evidence on changes in labour demand over the period 1980 89 for banks headquartered in canada france west germany italy japan and the united states the results suggest that there is relatively low substitutability of labour for capital in the production process of these banking organizations significant scale economies were found with regards to the expansion of output and the concomitant increase in labour in addition technological change operated to lower the quantity of inputs needed to produce a given level of outputs and increased the minimum efficient size bank over the sample period many of the production characteristics and technology effects varied significantly across countries these findings imply that intercountry differences in production characteristics and technological change should be explicitly recognized in bank strategic planning

branching restrictions and banking costs abstract previous research of banking costs has been limited by the choice of the functional form irregularities in the estimated cost functions and a failure to rigorously examine the difference between banks in branching states and banks in unit banking states this paper addresses these shortcomings banks are modelled as three input three output cost minimizing firms a three equation system is estimated using 1985 functional cost analysis data the findings indicate that banks in unit banking states experience diseconomies of scale banks in branching states experience diseconomies of scale at the bank level but economies of scale at the branch level we also find evidence of economies of scope for branch state banks but not for unit state banks

competitive pooling rothschild stiglitz reconsidered we build a model of competitive pooling which incorporates adverse selection and signaling into general equilibrium pools are characterized by their quantity limits on contributions households signal their reliability by choosing which pool to join in equilibrium pools with lower quantity limits sell for a higher price even though each household s deliveries are the same at all pools the rothschild stiglitz model of insurance is included as a special case we show that by recasting their hybrid oligopolistic competitive story in our perfectly competitive framework their separating equilibrium always exists even when they say it does not and is unique

practice what you preach microfinance business models and operational efficiency the microfinance sector has room for pure for profit microfinance institutions mfis non profit organizations and social for profit firms that aim to pursue a double bottom line depending on their business model these institutions target different types of borrowers change the size of their loans and adjust their loan pricing we introduce a simple approach that accommodates a wide range of business models and allows us to estimate the operational efficiency of mfis our empirical results show that mfis with a high depth of outreach are most efficient resulting in higher levels of outreach and profits for the same input mix

competitive insurance markets under adverse selection and capacity constraints abstract ever since the seminal work by rothschild and stiglitz q j econom 90 1976 629 on competitive insurance markets under adverse selection the problem of non existence of equilibrium in pure strategies has received much attention in the literature we extend the original analysis by considering firms which face capacity constraints which might be due to limited capital we show that under mild assumptions an equilibrium exists where every consumer obtains his appropriate rothschild stiglitz contract

non discriminating renegotiation in a competitive insurance market abstract a variant of the rothschild stiglitz model of a competitive insurance market is considered where each uninformed firm is allowed to renegotiate the contracts that its customers initially sign subject to the restriction that renegotiated contracts be offered to all the firm s customers such non discriminating renegotiation is shown to weaken the profitability of cream skimming to the extent that there exists a unique equilibrium outcome this outcome is that of miyazaki and spence i e the incentive compatible pair of zero profit contracts if efficient and the incentive compatible zero profit pair of contracts maximizing low risk utility otherwise

branch bank operating costs evidence from savings banks in finland empirical findings on branch bank operating costs are presented the analyses examine 1988 data for 646 individual branch offices representing 43 savings banks in finland another sample of 48 unit banks with no branches is collected comparisons of plant scale economics are made using the more traditional approach based on aggregate branch bank data versus individual branch office data moreover effects of the number of branches in the branching organization on individual branch office operating costs are examined finally direct comparisons of branch office versus unit bank operating costs are provided

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

a walrasian theory of markets with adverse selection the paper describes a walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome equilibrium exists under standard conditions it is shown that under certain conditions a stable set exists and is contained in a connected set of equilibria for generic models there exists a stable outcome that is all the equilibria in the stable set have the same outcome these ideas are applied to markets with one sided and two sided uncertainty under standard monotonicity conditions it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers

efficiency in the commercial banking industry a production frontier approach 1990 efficiency in the commercial banking industry a production frontier approach applied economics vol 22 no 4 pp 539 551

testing for expense preference behavior mutual versus stock savings and loans this article investigates expense preference behavior in the savings and loan industry previous studies used an intercept test and in general concluded that managers of mutual s ls exhibit expense preference behavior i derive the necessary and sufficient conditions on cost functions for the intercept test to be valid these restrictions are rejected for the savings and loan industry stock and mutual s ls have different cost structures and both have non cobb douglas production technologies i derive a new more general test for expense preference behavior that does not require the restrictive assumptions of the intercept test the results of this test do not support earlier conclusions of managerial expense preferences

homogeneity restrictions on the translog cost model a note benston hanweck and humphrey bhh 1 first applied the translog cost model to empirical analyses of depository institutions cost characteristics subsequent studies by benston berger hanweck and humphrey bbhh 2 murray and white 7 gilligan and smirlock 4 and gilligan smirlock and marshall gsm 5 have employed this type of flexible form cost function as a regularity condition the translog cost model should be linearly homogenous in all input prices that is given the following translog cost function

deregulation and oligopolistic rivalry in bank deposit markets abstract this paper provides a partial equilibrium analysis of a deregulated market for bank deposits in which banks behave oligopolistically but entry and exit are freely permitted it is demonstrated that the effects of variations in market interest rates reserve requirements and bank cost and demand conditions upon the market quantity of bank deposit money are fundamentally altered if the degree of bank rivalry adjusts endogenously hence banking deregulation may produce significant changes in the relationships between these variables and the stock of deposit money

economies of scale and scope in thrift institutions the case of finnish cooperative and savings banks accounting data on operating costs and outputs for cooperative and savings banks in 1983 and 1984 are used to provide empirical evidence on the cost structure of thrift institutions in finland a modified translog cost model is fitted to the data economies of scale and scope are estimated based on the coefficients of the cost model using advances and bills as outputs the results indicate that cost curves for both cooperative banks and savings banks generally tend to be l shaped at the plant level and u shaped at the firm level scope diseconomies are found in the joint production of advances and bills this evidenceindicates that natural monopoly conditions are not present in the finnish thrift industry

team production in competitive labor markets with adverse selection abstract team production is a frequent feature of modern organizations combined with team incentives team production can create externalities among workers since their utility upon accepting a contract depends on their team s performance and therefore on their colleagues productivity we study the effects of such externalities in a competitive labor market if workers have private information on their productivity we find that in any competitive equilibrium there must be pareto efficient separation of workers according to their productivity we further find that externalities facilitate equilibrium existence where under a particular condition on workers indifference curves even arbitrarily small externalities guarantee equilibrium existence