An Examination of Cost Subadditivity and Multiproduct Production in Large U.S. Banks

William C Hunter, Stephen G Timme and Won Keun Yang

Journal of Money, Credit and Banking, 1990, vol. 22, issue 4, 504-25

Abstract: This paper examines the subadditivity of costs for a sample of the largest commercial banks in the U.S. We introduce into the bank production literature the grid approach developed by Evans and Heckman (1984). We estimate two models of the bank cost function--one where deposits are treated as outputs, while in the other, deposits are treated as inputs. The models are estimated using the commonly used translog and the more flexible miniflex Laurent. Viewed narrowly, the findings imply that cost complementarities are not the RAISON D'ETRE for multiproduct production in the largest commercial banks. Subadditive costs, however, are sufficient but not necessary for multiproduct production. It is quite possible for multiproduct production to be optimal when output are produced independently (Levy and Haber (1986), and Teece (1980, 1982). It is only required that inputs be shareable as opposed to joint. Copyright 1990 by Ohio State University Press.

Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:22:y:1990:i:4:p:504-25

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