Measuring Scale and Scope Economies in Banking Using the Localized Translog Functional Form

Board of Governors of the Federal Reserve System Working Paper No 94-30

Posted: 6 Sep 1999

See all articles by Douglas A. McManus

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Abstract

This paper examines complications that arise in the nonparametric estimation of scale and scope economies. This paper presents a simple nonparametric strategy for estimating cost functions--the localization of the translog functional form--that is both easy to implement and has very desirable statistical properties. This estimator is used to fit a multiproduct cost function to data from the banking industry, and the estimates provide evidence that banking is an industry in which the major differences in efficiencies between banks are transitory. This results challenges past beliefs about X-efficiencies in banking and resolves a puzzle regarding the relative efficiencies of banks.

JEL Classification: C1, G2

Suggested Citation

McManus, Douglas A., Measuring Scale and Scope Economies in Banking Using the Localized Translog Functional Form. Board of Governors of the Federal Reserve System Working Paper No 94-30, Available at SSRN: https://ssrn.com/abstract=5855

Douglas A. McManus (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States
703-903-2953 (Phone)

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