Output Mix and Jointness in Production In the Banking Firm

Abstract

Most banking institutions offer a variety of services. Therefore, like any other multiple-product firm, the output mix issue is central for bank management decision making. A necessary condition for the optimization of outputs and inputs is the knowledge of the production function. In the case of banking, the solution to this problem is more complicated than in the general case due to conceptual and practical difficulties in defining and measuring outputs. The interdependence between the issues of optimal output mix and output measures has not received much attention in the banking literature. Positive studies in this area have concentrated on the problem of economies of scale while normative studies have dealt mainly with optimal output mix. In this paper an attempt is made to deal with both issues within the context of a multiple-product firm production function. Interdependence in bank output decisions can result either from the demand or the cost function or from both. In this paper the discussion centers on one possible source of interdependence on the cost side, namely, jointness in the production function of banks. Other sources of interdependence, e.g., jointness in the demand for bank services, also exist in reality. The model offered here permits a separation of other sources of interdependence from the main discussion. It was felt that such a separation is desirable for expository reasons. Section 2 of this paper presents a brief survey of the relevant literature on the subject. In section 3, a restrictive model of the environment within which banks operate is specified, and different types of bank cost functions are examined. The issue of jointness in decision making is raised in section 4. An analytical test for the