Heterogeneous Credit Union Production Technologies with Endogenous Switching and Correlated Effects
Econometric Reviews, Forthcoming
29 Pages Posted: 26 May 2016
Date Written: May 25, 2016
Credit unions differ in the types of financial services they offer to their members. This paper explicitly models this observed heterogeneity using a generalized model of endogenous ordered switching. Our approach captures the endogenous choice that credit unions make when adding new products to their financial services mix. The model that we consider also allows for the dependence between unobserved effects and regressors in both the selection and outcome equations and can accommodate the presence of predetermined covariates in the model. We use this model to estimate returns to scale for U.S. retail credit unions from 1996 to 2011. We document strong evidence of persistent technological heterogeneity among credit unions offering different financial service mixes, which, if ignored, can produce quite misleading results. Employing our model, we find that credit unions of all types exhibit substantial economies of scale.
Keywords: Credit Unions, Correlated Effects, Ordered Choice, Panel Data, Production, Returns to Scale, Switching Regression
JEL Classification: C33, C34, D24, G21
Suggested Citation: Suggested Citation