Returns to Scale in the Australian Life Insurance Industry*

This paper seeks evidence of economies of scale for superannuation, ordinary and total business of a sample of 38 Australian insurance companies. It was motivated by the work of Rutledge and Tuckwell, but in contrast to their results, significant evidence, of economies is found.     

Scale effects in Schumpeterian models of economic growth

Early models of Schumpeterian growth incorporate scale effects predicting that large economies grow faster than small economies, and that population growth causes accelerating per capita income growth. An absence of clear empirical evidence for these scale effects has led some researchers to question the foundations underlying the Schumpeterian approach to growth. This paper reviews empirical evidence on the relationship between scale and growth, and recent attempts to construct Schumpeterian growth models without scale effects.     

Production economies of small depository institutions in the post-FIRREA era: evidence from cooperative banks

To evaluate the effects of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 on the cost behaviour of thrift institutions, this study examines the economies of scale and scope of cooperative banks for the years 1992–94. The findings provide evidence of economies of scale and scope over the period under study. In addition, the results suggest the presence of product-specific economies of scale and scope with respect to a few of the products included in the portfolios of the samples. Some policy implications are drawn based on the findings.     

An update on economies of scale in credit unions

When employing the Benston-Bell-Murphy cost specification, most studies on economies of scale in financial institutions have consistently found small, yet significant economies. However, when a similar approach on credit unions was used, the results were conflicting. This paper, through the use of a different methodological and statistical approach, provides additional evidence on the existence of economies of scale in credit unions.     

Can Labor Emigration Affect the Education of Girls? Evidence from Tajikistan

This study examines how large-scale, predominantly male emigration affects the education of girls staying in Tajikistan, the poorest post-Soviet state and one of the most remittance-dependent economies in the world. Using data from a three-wave household panel survey conducted in 2007, 2009, and 2011, this study finds that the net effect of migration on girls’ schooling turns from positive to negative with girls’ age. These results lend support to various conceptual channels through which the emigration of household members may affect girls’ education, including the relaxation of budget constraints, a change of the household head, and an increase in household work. At the practical level, the results imply that migration can be detrimental to women’s empowerment and cast doubt on whether emigration is an appropriate long-term development strategy for Tajikistan.     

Scale economies in manufacturing: Problems of robust estimation

The purpose of the paper is to develop a cost frontier model and its robust estimation for analyzing the impact of scale economies in the manufacturing sector. Indirectly our estimates provide a test of the new growth theory which emphasizes the role of increasing returns to scale as a major force in the sustained growth process. An illustrative application to the South Korean manufacturing sector finds strong supportive evidence for significant scale economies, though in recent years it may be declining for the Korean economy.     

Economies of density, scale and scope in the water supply and sewerage sector: a study of four developing and transition economies

Using panel data, we estimate measures of density, scale and scope economies in four countries that differ substantially in their levels of economic development and in their piped water and sewerage coverage: Brazil, Moldova, Romania and Vietnam. We find evidence of economies of scale in Moldova, Romania and Vietnam. In Brazil, we cannot reject the null hypothesis of constant returns to scale. The results of this study show that the cost structure of water and sewerage utilities varies significantly within and between countries and over time.      

Examination of economies of scale in credit unions: a New Zealand study

Recent government pressure and aspirations within the industry itself to improve financial stability, have seen credit unions pursue economies of scale to achieve this objective. This presented an opportunity to test the validity of this strategy. However, this study is uncommon, as it utilized the credit union population as the unit of analysis, rather than a sample, prevalent in other research. As a consequence this overcomes difficulties associated with multiple testings, and other statistical problems present in some other previous studies. By drawing upon two measures of operational efficiency, viz. operating costs to income and operating costs to total assets, inconclusive evidence of scale economies was found. While clear efficiency improvement occurred in moving from small to medium sized organisations, less compelling was the evidence of economies of scale in larger credit unions. Although the article followed a conventional cross-sectional methodology by examining performance at a moment in time, the study also adopted a longitudinal case study approach, by examining over time the efficiency of a large credit union. Finally, the measure used, inclusion or exclusion of outliers, and the operational efficiency ratio chosen, all effect the outcome, and either showed evidence of economies or diseconomies, of scale.     

Resolving the impasse on hospital scale economics: a new approach

The existence of scale economies in hospitals in important for both public and managerial policy, yet production and cost function studies have found conflicting evidence. More recently, more sophisticated studies have typically found scale diseconomies, which is inconsistent with the views of industry participants and observers. In the early 1980s. California deregulated both private and public health insurance (Medical), which provides a natural laboratory for examining hospital efficiency. Using Stigler's original and multivariate survivor analysis, we resolve the conflict in favour of scale economies, and reconcile the controversy. The survivorship methodology in simple to apply, and a useful tool in conjunction with statistical cost and production studies.     

Economies of scope and scale in the Norwegian electricity industry

An important issue for multi-product firms to consider is economies of scope, i.e., whether there is any benefit from producing two or more products, or whether specializing in producing only one product would be less costly. We examined the economies of scope for Norwegian electricity companies because policy makers have decided to force companies that both generates and distributes electricity to split their operations into two companies, one engaged in generation only and the other in distribution only. We set out to test the validity of the policy makers decision on unbundling generation and distribution. Using data from Norwegian electricity companies for the period 2004–2014, we found evidence of economies of scope, meaning that policy makers’ insistence on separating generation and distribution companies will have increased costs. We also found evidence of economies of scale, meaning that there are cost savings in expanding outputs. Our findings provide important information to consider in future policy decisions in the Norwegian electricity industry, probably with implications for other countries.     

Estimation of scale and scope economies in multiproduct banking: evidence from the Fourier flexible functional form with panel data

An empirical study is conducted on scale and scope economies for Taiwan's banking industry with panel data using a Fourier flexible cost function developed by Gallant and a translog cost function, both of which take economic efficiency into account. It is found that the Fourier form is more appropriate than the traditional translog form in fitting the data, and that various efficiency measures computed using the Fourier function are compatible with each other, while those computed using the translog function are not. The Fourier evidence shows that sample banks continue to enjoy economies of scale, and exhibit scope diseconomies, which indicates that greater product diversification can reduce banking costs through product-mix economies. Banks may benefit from further diversifying their line of financial services.     

Estimating Market Power in the South African Banking Sector

Indicators of market power can be ambiguous because cost economies associated with scale and not market imperfections may influence results. This article illustrates that without direct measures of concentration, estimates of costs, scale economies and profitability can be used to identify market power in banking. Secondly, via this method, econometric estimates provide meaningful evidence of market power in the South African banking sector over the study sample period (1979–1998). A reasonable conclusion is that while industrial structure is important, careful consideration needs to be given to cost economies and profitability when assessing market power. In addition, there is a need to consider appropriate policy to reduce market power in banking in South Africa.     

Scale and scope economies for drug abuse treatment costs: evidence for Washington State

Drug abuse treatment has been pervasive in the US in the recent years, and the associated direct treatment costs approached $18 billion in 2001. However, there have been few published studies on scale economies, and none on scope economies, for drug abuse treatment costs. We estimate a restricted cost function for 17 hospitals in Washington State that provided inpatient and/or outpatient drug abuse treatment during the years 1997–2004. We find significant evidence of scale economies for hospitals that provide only outpatient drug abuse treatment services. The marginal costs of outpatient services are even smaller for hospitals that produce both outpatient and inpatient drug abuse treatment services. Further, these joint-production hospitals exhibit diseconomies of scope, or specialization economies. These results all imply that recent trends towards additional outpatient treatment services will enhance cost efficiency.     

A Fourier analysis of the US dairy industry

Measurement of economies of scale and scope is particularly important for predicting growth and product diversification. However, estimates are useful only to the extent the underlying production technology is modelled accurately. This study measures economies of scale and scope in the rapidly changing US dairy industry with a Fourier flexible cost function, which provides a global approximation of the unknown function. We use the high quality national Agricultural and Resource Management Survey (ARMS) survey data. We find economies of scale at most firm sizes and persistent economies of scope across firm sizes in this industry, which is counter to estimates from two Diewert‐flexible functional forms.     

On the income dependence of equivalence scales

Household consumption exhibits economies of scale as the number of household members increases. We collect survey data from two countries, Germany and France, in order to obtain direct subjective estimates of household consumption economies of scale, and, in particular, to examine an additional dimension: whether household consumption economies of scale change as living standards go up. Our data from both countries indicate strongly that household economies of scale increase as the living standard goes up. We discuss the robustness of our survey method and compare our results to these of alternative estimation methods in the literature.     

On causality in the size-efficiency relationship: the effect of investor cash flows on the mutual fund industry

One of the perceived advantages in mutual fund management is the presence of economies of scale resulting from fund size. This article analyses the impact of mutual fund cash flows on the relation between size and performance, demonstrating that performance determines asymmetric variations in fund assets, particularly in mutual equity funds. Therefore, the more efficient funds generate broad enough cash flow entry that increases the relative size of the fund, leading to an implicit and positive relation between size and performance. So, if the average size over the period sample is used as a measure of size, such a relation would be biased. When the initial size is used, this bias is avoided and, in general, an insignificant relation is found between size and performance. These results are controlled by mutual fund costs using gross returns to estimate performance. The evidence is robust, and shows only weak evidence of a negative relation between size and performance for the balanced funds that is driven by a low positive relation between costs and size; precisely, the contrary that is expected from the hypothesis of the presence of economies of scale.     

Strategy, Scale or Policy? Exit in the Australian Car Industry

This paper estimates the importance of strategy, scale and policy in determining the pattern of exit in the Australian car industry. Previous studies found only a weak role for strategy in exit from declining industries. Using a new dataset and improvements on the specification used in earlier studies, we find evidence that strategy influences the pattern of exit where economies of scale are less important. Protection is also found to negatively influence the likelihood of exit.     

Economies of scale for broadband in rural United States

Empirical cost models for wireline broadband circuits are used to test whether economies of scale exist in rural areas and whether new Ethernet technology lowers the unit cost of broadband transportation. Previous studies have shown small or nonexistent economies of scale for wireless technology. Results from earlier studies also demonstrated economies of scale for voice-only wireline networks which diminished with network size and were fully exploited for large networks. To our knowledge presence of economies of scale for wireline broadband networks has not been tested, certainly not in rural United States. We use data supplied by more than 500 rural local exchange carriers and find economies of scale for small rural wireline broadband providers. Market size limitations appear to prevent rural telephone companies from fully exploiting unit cost savings. The data also show increasing capacity over existing broadband connections is subject to substantial economies of scale, but such economies diminish quickly as bandwidth capacity increases. The data do not support the hypothesis that Ethernet technology reduces broadband transmission cost.     

Economies of scale in the Australian tourism industry

The measurement of economies of scale in the tourism industry has not been done to this point, as tourism is not a specific industry according to international statistical standards. Among many industries related to tourism, four sectors (accommodation, transport, retail trade and recreational services) across six states and two territories from 1997 to 2007 are studied as they contribute nearly 70% of tourism output in Australia. By comparing regression results from the Cobb–Douglas (C–D) production function and the translog production function, we find that there is evidence of increasing returns in transport, retail trade and recreational services at the industry level. However, accommodation is characterized by constant returns to scale at the industry level. As accommodation is responsible for the biggest share of tourism output, this suggests that overall the tourism sector is not characterized by increasing returns. We also find that the degrees of returns to scale from the C–D and translog production functions are different and that the imposition of input share also influences the empirical results. Both of these factors stress the importance of model specification to the measurement of economies of scale.     

Do Geographic Scale Economies Explain Disturbances to Heckscher–Ohlin Trade?

This paper examines whether "geographic scale economies" explain the trade that remains unexplained by the Heckscher–Ohlin model. The paper develops a theoretical specification that integrates geographic scale economies into the Heckscher–Ohlin model, and develops a statistical method for detecting geographic scale economies in the distributional features of a disturbance term. The units of analysis are US states. The findings reveal that empirical support for the Heckscher–Ohlin theory is improved by accounting for geographic scale economies within states; geographic scale economies do not generate differences in Rybczynski effects across states; and the scope of geographic scale economies is contained within states.