Economies of Scale and Scope at Large Commercial Banks: Evidence from the Fourier Flexible Functional Form

Abstract

This study contributes new evidence on bank cost efficiency by computing efficiency measures from estimated cost functions. It overcomes deficiencies of previous studies by restricting the sample to homogeneous banks and by estimating Fourier flexible cost functions. A Fourier flexible cost function, which has the translog nested within it, can potentially approximate an arbitrary cost function well over the function's entire range. Functions consistent with both the 'intermediation' and 'production' approaches are estimated using 1986 and 1990 Call Report data for large banks. The computed efficiency measures show little evidence of scale and scope economies. In addition, tests reveal translog cost functions to be biased. Copyright 1996 by Ohio State University Press.