an econometric analysis of u s foreign direct investment this paper constructs a theoretical model of foreign direct investment and examines the extent to which the model can explain the level of outward direct investment by u s companies over the last two decades the authors find that market size and factor costs both labor and capital are important factors in the investment decision instrumental variable estimation is used to demonstrate that the expectation of short run fluctuations in the dollar also influences the timing of investment copyright 1996 by mit press

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

scale and scope economies at large banks including off balance sheet products and regulatory effects 1984 1991 this paper examines the impact of the risk based capital rbc requirements on bank cost efficiencies we take into consideration both on and off balance sheet obs products and allow product mixes to differ across banks and to vary over time our empirical results suggest that the cost structures of large banks are significantly different during the pre rbc and post rbc periods that is the rbc change seemed to reduce the optimal bank size that achieves maximum scale and scope economies so that some of the large banks that previously were efficient became too large and inefficient the results suggest that regulations that encourage large banks to expand their production and product mixes any further will likely result in a less efficient banking industry

a test for subadditivity of the cost function with an application to the bell system stable url http links jstor org sici sici 0002 8282 28198409 2974 3a4 3c615 3aatfsot 3e2 0 co 3b2 rthe american economic review is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgmon jul 2 16 52 19 2007

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

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

big bank mergers in europe an analysis of the cost implications this paper examines the cost implications from hypothetical cross border bank mergers in the eu in light of recent claims that substantial cost savings could be expected as the result of the eu s single market programme for financial services in fact our results suggest only limited opportunities for costs saving from big bank mergers and indicate that such mergers are more likely to result in an increase in total costs while there is a large variation in the simulated cost outcomes the greatest opportunities for cost savings would appear to be generated by mergers between german and italian banks in contrast mergers between french and german banks appear likely to result in substantial cost increases although the overall findings suggest limited benefits from cross border mergers between large banks this may be a reflection of the methodology merger simulations are carried out hypothetically ignoring any prior information about the pairings we assume no premiums or merger costs and no further synergies resulting from such things as branch closures or a restructuring of the product mix these assumptions may cause us to understate the potential reduction in total costs resulting from large bank mergers and therefore our estimates provide the most pessimistic of total cost reduction outcomes in conclusion the substantial variation of cost outcomes generated suggests that large banks seeking economies through cross border mergers should select potential partners with great care

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 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

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

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 robustness of output measures in property liability insurance efficiency studies abstract we empirically examine two methods for measuring output in property liability insurer efficiency studies the value added approach and the flow or financial intermediation approach the approaches are not mutually consistent the value added approach is closely related to traditional measures of firm performance but the flow approach is not in addition efficient value added approach firms are less likely to go insolvent while firms characterized as efficient by the flow approach are generally more likely to fail we also find that the theoretical concern regarding the value added approach s use of losses as a measure of output is not validated empirically

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

effects of deregulation on failing thrift institutions the purpose of this paper is to test the hypothesis that much of the decline in the net worth of the failing saving and loan institutions was a result of deregulation variables are developed to represent major actions to deregulate sltime series analysis is developed to estimate the effects of financial deregulation on failing thrifts net worth the data are 1984 89 balance sheet adn income statement data for thrift institutions prior to the enactment of the 1989 legislation to solve the crisis the reuslts of the analysis indicate that deregulation of asset and deposit activities was not the cause of the financial distress of failing us thrift institutions the primary cause appears to be the increase in the federal deposit insurance limit to 100 000 and how attractive this legislative action made brokering deposits that became insured up to 100 000

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

measuring economies of scale and scope in agricultural banking generally empirical studies have used either duality theory with the estimation of cost functions or nonparametric estimation methods to assess efficiency in the financial services industry the purpose of the present study is to estimate economies of scope and scale in agricultural banking this will be accomplished through estimation of an indirect multi product cost function the uniqueness of this study when compared to previous studies of efficiency of the financial services industry is the disaggregation of the outputs so that agricultural lending can be evaluated in addition a normalized quadratic cost function is estimated with curvature properties imposed clark reviewed thirteen studies that measured economies of scope and scale for commercial banks credit unions and savings and loan associations he found that they offered four broad conclusions a overall economies of scale exist at low levels of input b no consistent evid nce of economies of scope exists c some evidence of cost complementarities exists and d the results seem to be robust among financial institutions

production economies of small depository institutions in the post firrea era evidence from cooperative banks to evaluate the effects of the financial institutions reform recovery and enforcement act firrea of 1989 on the cost behaviour of thrift institutions this study examines the economies of scale and scope of cooperative banks for the years 1992 94 the findings provide evidence of economies of scale and scope over the period under study in addition the results suggest the presence of product specific economies of scale and scope with respect to a few of the products included in the portfolios of the samples some policy implications are drawn based on the findings

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

firm efficiency and the regulatory closure of s ls an empirical investigation this paper uses a two step methodology to examine the relationship between firm inefficiency and the regulatory closure of savings and loans s ls in the first step using multiproduct translog stochastic cost frontiers the authors estimate inefficiency scores separately for mutual and stock s ls operating in the southwest in 1988 they use the inefficiency scores in second step logit models to identify determinants of regulatory closure for both mutual and stock s ls the authors find a significant positive relationship between firm inefficiency and regulatory closure they also find a greater probability of closure for s ls in economically depressed states copyright 1993 by mit press

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

returns to scale and input substitution for large u s banks the united states commercial banking industry has experienced significant changes in recent years the recent wave of mergers and the near term prospects of interstate banking suggests that the industry is moving toward much larger average banking organizations rhoades 1985 will a more concentrated banking industry result in lower costs due to scale economies we address this question by examining the cost function for large banks numerous studies of economies of scale in banking exist generally tracing their roots to the classic papers by benston 1965 and bell and murphy 1968 a good review of the most recent studies can be found in clark 1988 the majority of the papers uses samples of smaller banks that is under 1 billion in deposits finding generally that economies of scale are quickly exhausted and that further increases in bank size occur at constant or possibly increasing cost the extrapolation of previous findings for samples of smaller banks to large banks may be problematic especially in the current environment first large banks service a different mix of markets and customers than small banks suggesting that large and small banks probably face different cost structures second the process of deregulation may have rendered the results of prior studies moot since the data pertain to periods before significant deregulation since we

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

frontier estimation and firm specific inefficiency measures in the presence of heteroscedasticity the purpose of this article is to illustrate a straightforward and useful method for addressing the problem of heteroscedasticity in the estimation of frontiers a heteroscedastic cost frontier model is developed and estimated using bank cost data similar to that used by ferrier and lovell our results show dramatic changes in the estimated cost frontier and in the inefficiency measures when accounting for heteroscedasticity in the estimation process we find that the rankings of firms by their inefficiency measures is affected markedly by the correction for heteroscedasticity but not by alternative distributional assumptions about the one sided error term

finite mixture estimation of multiproduct cost functions this paper presents a technique of cost function estimation based on the theory of finite mixture distributions which allows for the simultaneous existence of multiple technologies of production when the researcher does not know which observations correspond to which technologies the finite mixture technique provides estimates of the proportions of firms using the various technologies facilitates comparisons between technologies and preserves the traditional interpretations of cost estimation after describing the mixture procedure the technique is illustrated on a large sample of savings and loan associations and it is concluded that this industry exhibits multiple technologies of production copyright 1991 by mit press

efficiency and technical progress in banking empirical results for a panel of german cooperative banks abstract using 1989 1992 individual data of 757 german cooperative banks and applying the intermediation approach we specify a multi product translog cost function for this part of the german banking industry for all size classes moderate economies of scale can be identified there is also evidence of economies of scope which supports the notion of universal banking as for cost efficiency we find that the average banks in all size classes deviate considerably from the best practice cost frontier all banks enjoy growth of total factor productivity which is higher for the smaller banks in the sample

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

on multiple discount rates we propose a theory of intertemporal choice that is robust to specific assumptions on the discount rate one class of models requires that one utility stream be chosen over another if and only if its discounted value is higher for all discount factors in a set another model focuses on an average discount factor yet another model is pessimistic and evaluates a flow by the lowest available discounted value

assessing competition in the banking industry a multi product approach abstract this paper investigates the competitive aspects of multi product banking operations extending panzar and rosse s 1987 model to the case of a multi product banking firm we show that higher economies of scope in multi product banking are associated with lower panzar rosse measures of competition in the banking sector to test this empirical implication and determine the impact of multi production on market power we use a new dataset on the brazilian banking industry consistent with our theoretical prediction we find that banks that offer classic banking products i e loans and credit cards and other banking products i e brokerage services insurance and capitalization bonds have substantially higher market power than banks that offer only classic products these results suggest a positive bias in the traditional estimates of competition in which multi output actions are not considered