Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope

Colin Lawrence

Journal of Money, Credit and Banking, 1989, vol. 21, issue 3, 368-79

Abstract: 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.

Date: 1989
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