Efficiency and economies of scale of large Canadian banks

Abstract.  This paper measures the economies of scale of Canada's six largest banks and their cost-efficiency over time. Using a unique panel data set from 1983 to 2003, we estimate pooled cost functions and derive measures of relative efficiency and economies of scale. The disaggregation of the data allows us to include non-traditional outputs as well as time-varying, bank-specific effects. Our model leads us to reject constant returns to scale. These findings suggest there are potential scale benefits in the Canadian banking industry. We also find that technological and regulatory changes have had significant positive effects on the banks' cost structure.     

A re-examination of the demand for money in small developing economies

This paper re-examines the money-demand function in three small open economies of Asia: Korea, Pakistan and Singapore. In addition to using the relatively new procedure of error-correction modelling, the roles of variables such as (a) the expected change in the exchange rate, (b) foregin interest rates, and (c) foreign exchange risks on money demand are examined. In testing the importance of these variables in the money-demand function, special attention is paid to testing the assumptions of the classical linear regression model. The sample period for each country spans from 1973:1 through 1990:1. The empirical results suggest that the error-correction specification performs very well. In addition to the traditional variables, the results suggest that at least some measure of foreign monetary developments appear to have some significant effect on money-demand behaviour in these small developing economies.     

Nonuniqueness of solutions in applied general equilibrium models with scale economies and imperfect competition

Summary Since the publication of Harris (1984), applied general equilibrium models with imperfect competition and economies of scale have been extensively used for analyzing international trade and development policy issues. Their attractiveness comes from their offering a natural framework for testing the empirical relevance of numerous propositions from the industrial organization and new trade theoretical literature. Their role in the recent debates on the North American Free Trade Agreement demonstrates their potential importance in policy analysis. This paper warns model builders and users that considerable caution is however needed in interpreting the results and in deriving strong policy conclusion from these models: it is shown that in this generation of applied general equilibrium models, nonuniqueness of equilibria is not a theoretical curiosum, but a potentially serious problem. Disregarding this may lead to dramatically wrong policy appraisals.I am particularly indebted to Tim Kehoe both for his comments and for pinpointing a flaw in a previous version of the paper. I also thank for comments, discussions and/or encouragements Irma Adelman, Len Dudley, Robert Gary-Bobo, Rick Harris, Ed Prescott, Jacques Robert, Herb Scarf, T. N. Srinivasan, and an anonymous referee. Financial support from the FCAR of the Government of Québec and from the SSHRC of the Government of Canada and hospitality from the Federal Reserve Bank of Minneapolis are gratefully acknowledged.     

A note on multiproduct economies of scale and economies of scope

Two measures of (local) economies of scale for a firm producing more than two products are derived using measures of product-specific economies of scale and economics of scope. The latter is especially useful for econometric estimation and testing.     

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.     

Quality and economies of scale in higher education

This study attempts to develop and empirically estimate an average cost and output reltion for average total for higher education. Statistical results based on data for top PhD granting institutions suggest there are economies of scale in higher education. Academic reputation is also an important variable in explaining variations in average total cost.     

Private information in large economies

This paper examines the effect of private information in large economies. We show that in a model with stochastic information structures, the restrictions imposed on allocations by the presence of private information disappear in large economies. We also show that for a large class of direct mechanisms, the incentive for any agent to falsely report private information goes to zero as the number of agents becomes large. These results provide an “informational smallness” analog to existing “quantity smallness” limiting results in the literature.     

Fair allocations in large economies

The purpose of this paper is the study of problems of equity in an economy with many agents. Conditions are given under which every equitable and Pareto optimal allocation is a competitive equilibrium with equal incomes for all agents. The results are also of potential relevance for the literature on incentive compatibility since the allocations that are obained through incentive mechanisms in large economies turn out to be equitable.     

Ownership structure and efficiency in large economies

We analyze the limit behavior of sequences of oligopolistic equilibria in which firms follow objectives consistent with their shareholders?? interests. We show that convergence to a competitive outcome may fail for some distributions of firms?? shares across consumers and provide a characterization of the class of ownership structures that lead to Walrasian equilibrium allocations in the limit.     

Value allocation with economies of scale

The Aumann-Shapley Value allocation is shown to be in the Core of a benefit allocation game with non-decreasing returns to scale. The value coincides with the competitive allocation for a cost function that is homogeneous of degree one.     

Entrepreneurship prompts institutional change in developing economies

The Review of Austrian Economics - Entrepreneurship plays a pivotal role for institutional change and economic development in transition and developing economies. Formal and informal institutions...     

A law of large numbers for large economies

Summary LetX(i),i[0; 1] be a collection of identically distributed and pairwise uncorrelated random variables with common finite mean and variance ². This paper shows the law of large numbers, i.e. the fact that ₀ ¹ X(i)di=. It does so by interpreting the integral as a Pettis-integral. Studying Riemann sums, the paper first provides a simple proof involving no more than the calculation of variances, and demonstrates, that the measurability problem pointed out by Judd (1985) is avoided by requiring convergence in mean square rather than convergence almost everywhere. We raise the issue of when a random continuum economy is a good abstraction for a large finite economy and give an example in which it is not.I am indebted to Hugo Hopenhayn. Furthermore I would like to thank Dilip Abreu, Glenn Donaldson, Ed Green, Ramon Marimon, Nabil Al-Najjar, Victor Rios-Rull, Timothy van Zandt and the editor for useful comments. The first version of this paper was written in 1987.     

Distributional conflict in small open economies

We aim at a better understanding of the inefficiencies resulting from distributional conflict in small open economies. To this end, a general equilibrium model with the following characteristics is set up: two groups of agents (capitalists and workers), an endogenous income tax, productive government expenditures, social transfers, and an outside option for capital. The overall distributional-conflict inefficiency is decomposed into three components: (i) a fundamental time inconsistency problem; (ii) strategic interaction in the political process; (iii) heterogeneity among individuals and the resulting unavoidable conflict of interest. A numerical exercise (based on OECD data) indicates that the distributional-conflict inefficiency may cause a substantial output loss.     

Tariff strategies and small open economies

In this paper we examine the issue of optimal tariffs for a small economy that trades with a large economy. We define 'small' and 'large' in the sense that the world prices are determined solely by the large country, and, therefore, the small country faces exogenously given world prices. Within this framework it is shown that there exist situations in which the small country has an incentive to behave as a Stackelberg leader by committing itself to a non-zero optimal tariff. Although the small country is unable to directly affect world prices, by pre-committing to a non-zero trade tax it may induce a reduction of the large country's optimal trade tax, thereby indirectly improving its terms of trade and welfare. JEL Classification: F13, F35
Stratégies de droits de douane et petites économies ouvertes. Ce mémoire examine le problème des droits de douane optimaux pour une petite économie qui commerce avec une grande. On définit 'petit' et 'grand' en un sens économique: les prix mondiaux sont déterminés seulement par le grand pays et le petit pays fait face à des prix mondiaux exogènes. A l'intérieur de ce cadre d'analyse, les auteurs montrent qu'il existe des situations dans lesquelles le petit pays est incitéà se conduire en leader à la Stackelberg en s'engageant fermement dans une politique de droit de douane optimal différent de zéro. Même si le petit pays ne peut pas influencer directement les prix mondiaux, en adoptant une politique ferme de droits de douane positifs, il peut amener le grand pays à réduire son niveau de droit de douane optimal, et, ce faisant, améliorer ses propres termes d'échange et son propre niveau de bien-être.     

Higher education costs and scale and scope economies

Higher education multi-product cost functions are estimated for the public and private sectors disaggregated by research, comprehensive, baccalaureate, and associate level institutions. The output mix incorporates professional school teaching output, in addition to undergraduate and graduate teaching and research outputs. Scale and scope economies are examined by sector and institutional level, also accounting for regional differences. Ray economies are found throughout the private sector, but confined to lower level public institutions. Research economies are widespread throughout all sector levels. Economies of scope prevail among private institutions across levels, but only among comprehensive and baccalaureate public colleges.     

Moral hazard and general equilibrium in large economies

Summary. The paper analyzes a two period general equilibrium model with individual risk, aggregate uncertainty and moral hazard. There is a large number of households, each facing two individual states of nature in the second period. These states differ solely in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period each household chooses a non-observable action. Higher levels of action give higher probability of the good state of nature to occur, but lower levels of utility. Households' utilities are assumed to be separable in action and the aggregate uncertainty is independent of the individual risk. Insurance is supplied by a collection of firms who behave strategically and maximize expected profits taking into account that each household's optimal choice of action is a function of the offered contract. The paper provides sufficient conditions for the existence of equilibrium and shows that the appropriate versions of both welfare theorems hold. Received: December 7, 1998; revised version: October 25, 1999