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Measuring scale and scope economies in multiproduct banking? A stochastic frontier cost function approach

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  • Tai-Hsin Huang
  • Mei-Hui Wang

Abstract

Most studies on the economies of scale and scope in the banking industry assume no x-inefficiencies. That is, banks are assumed to be always on their efficient frontier, which can in empirical studies confound scale and scope efficiencies with x-efficiencies. The current paper employs a stochastic frontier cost function incorporating technical and allocative inefficiencies, as well as a system of share equations, to estimate scale and scope efficiencies. Using data from Taiwan's banking industry, evidence is found that both scale and scope economies exist, and that the assumption of no x-inefficiencies results in underestimating such economies.

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  • Tai-Hsin Huang & Mei-Hui Wang, 2001. "Measuring scale and scope economies in multiproduct banking? A stochastic frontier cost function approach," Applied Economics Letters, Taylor & Francis Journals, vol. 8(3), pages 159-162.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:3:p:159-162
    DOI: 10.1080/13504850150504513
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    Citations

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    Cited by:

    1. Chavas, Jean-Paul & Barham, Bradford L., 2007. "On the Microeconomics of Diversification under Uncertainty and Learning," Staff Papers 92141, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    2. Jean-Paul Chavas, 2011. "On the microeconomics of diversification under learning," Journal of Economics, Springer, vol. 104(1), pages 25-47, September.
    3. Tai-Hsin Huang & Ying-Ting Liao & Li-Chih Chiang, 2010. "An examination on the cost efficiency of the banking industry under multiple output prices' uncertainty," Applied Economics, Taylor & Francis Journals, vol. 42(9), pages 1169-1182.
    4. Kwon, Oh Sang & Yun, Won-Cheol, 2003. "Measuring economies of scope for cogeneration systems in Korea: a nonparametric approach," Energy Economics, Elsevier, vol. 25(4), pages 331-338, July.
    5. Chavas, Jean-Paul & Kim, Kwansoo, 2010. "Economies of diversification: A generalization and decomposition of economies of scope," International Journal of Production Economics, Elsevier, vol. 126(2), pages 229-235, August.
    6. Jean-Paul Chavas & Kwansoo Kim, 2007. "Measurement and Sources of Economies of Scope: A Primal Approach," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 411-427, September.
    7. Abhiman Das & Sangeeta Das, 2007. "Scale economies, cost complementarities and technical progress in Indian banking: evidence from fourier flexible functional form," Applied Economics, Taylor & Francis Journals, vol. 39(5), pages 565-580.
    8. Tai‐Hsin Huang & Mei‐Hui Wang, 2003. "Estimation of Technical and Allocative Inefficiency Using Fourier Flexible Cost Frontiers for Taiwan's Banking Industry," Manchester School, University of Manchester, vol. 71(3), pages 341-362, June.
    9. G. Sav, 2012. "Stochastic Cost Frontier and Inefficiency Estimates of Public and Private Universities: Does Government Matter?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(2), pages 187-198, May.
    10. G. Thomas Sav, 2012. "Cost Efficiencies and Rankings of Flagship Universities," American Journal of Economics and Business Administration, Science Publications, vol. 3(4), pages 596-603, January.
    11. Eder, Andreas, 2018. "Measuring and decomposing economies of diversification: An application to biogas-fuelled cogeneration plants in Austria," International Journal of Production Economics, Elsevier, vol. 204(C), pages 421-432.

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