RELATIVE PRICE EFFICIENCY, TECHNICAL CHANGE, AND SCALE ECONOMIES FOR LARGE COMMERCIAL-BANKS

One of the more important and frequently researched topics in banking is the production process. Previous studies of bank production, however, have employed a methodology which is not appropriate for regulated firms. We generate cost estimates for large commercial banks utilizing a generalized cost model which subsumes the commonly used model as a special case. Our findings suggest that the traditional methodology is inappropriate for the sample banks and generates biased estimates of cost parameters, scale effects, and the influence of technological change. The new methodology allows us to measure directly the effect of regulation on bank costs. The effect found is small, but significant. © 1990 Kluwer Academic Publishers.