Measuring Scale and Scope Economies in Banking Using the Localized Translog Functional Form

This paper examines complications that arise in the nonparametric estimation of scale and scope economies. This paper presents a simple nonparametric strategy for estimating cost functions--the localization of the translog functional form--that is both easy to implement and has very desirable statistical properties. This estimator is used to fit a multiproduct cost function to data from the banking industry, and the estimates provide evidence that banking is an industry in which the major differences in efficiencies between banks are transitory. This results challenges past beliefs about X-efficiencies in banking and resolves a puzzle regarding the relative efficiencies of banks