Economies of Scale and Economies of Scope in Multiproduct Financial Institutions: A Study of British Columbia Credit Unions

This paper investigates the production technology facing computerized credit unions in Canada. A full system of translog cost equations is estimated in order to test for economies of scale, economies of scope, and other production characteristics in a multiproduct context. The regression results indicate that most of the credit unions in our sample experience significant increasing returns to scale as they expand their level of output. There is also evidence of cost complementarity or economies of scope in their mortgage and other lending activities. As a result, legislation which limits the ability of credit unions to grow and diversify will likely raise the operating costs of this important group of financial institutions. Additional structural tests of the most general translog specification suggest that none of the restrictive production conditions commonly imposed by other researchers using Cobb-Douglas and CES specifications provide a valid representation of credit union technology. The results of many earlier studies are therefore open to question.     

The Inequality of Household Incomes in Australia*

This paper presents income inequality statistics for Australia calculated from the published results of the two official income surveys of 1968-69 and 1973-74. These results suggest firstly that the level of household income inequality in Australia has been previously understated. Secondly, it is noted that there was little, if any, change in inequality over the period. However, when families are classified by number of income earners an unambiguous decline in inequality within these groups occurs. These observations are related to other changes in the economy.     

Some Implications of Uncertainty in a Small Open Economy

Consider a small open economy which produces two commodities, the first a consumers' good and the second a producers' good, by means of a conventional no-joint-products technology. Suppose that one of the two production functions is subject to a random multiplicative disturbance and that factors of production must be allocated to the two industries before the realization of the random variable. It is known that if in the absence of uncertainty production is incompletely specialized then the same is true under uncertainty although the average output of the uncertain industry is lower. In the present paper we suppose that each of the two production functions is subject to a random multiplicative disturbance but restrict our attention to three particular cases: the polar cases of perfect correlation, positive and negative, and the intermediate case of zero correlation. It is shown that in none of these cases does there exist an obvious and complete analogue of the above proposition but that in each case something definite can be said, either about the possibility of complete specialization under uncertainty or about the effect of uncertainty on the allocation of factors (but not about both).     

Using Copulas to Model Switching Regimes with an Application to Child Labour*

The copula approach to econometric modelling involves the specification of the separate components of the joint distribution of the random variables of interest: models built for each margin are bound together using a copula function. In this paper, the copula approach is used to construct models for switching regimes. The construct is illustrated by fitting a wage earnings model for child workers in the early 1900s, with regimes governed according to literacy. The results improve on earlier modelling efforts by Poirier and Tobias (2003), finding that a child worker may on average expect a reduction in earnings from being literate.     

Monetary Policy and Capital Inflow*

Capital inflow has been depicted in the model developed by Pentti Kouri and Michael Porter as being determined exclusively by monetary forces, with GNP entering the equation through its impact on the demand for money. If this is correct, disaggregation of GNP should have little effect on the estimates of response parameters in the model. It is found that replacing GNP by investment and non-investment spending has a significant effect on the estimates, suggesting that capital inflows have direct purposes which are not well represented in a purely monetary model. An attempt is made to construct a money policy equation as the second part of a simultaneous system depicting the interplay of monetary policy and capital inflow. In spite of claims to the contrary, it is found that simultaneous estimation gives results which differ considerably from those of single-equation methods.     

The Importance of Being Honest*

Given individual propensities to cheat (stealing, overcharging, etc.), the optimality conditions for the amount of resources devoted to law enforcement and for the severity of penalties on convicted cheats are derived. In some interesting cases, the optimal penalty equals the market price divided by the probability of conviction and it is optimal to spend very little on enforcement and impose a severe penalty. These conclusions seem to apply to the practical case of metered parking violation.     

Equilibrium Exhaustible Resource Price Dynamics

We develop equilibrium models of exhaustible resource markets with endogenous extraction choices and prices. Our analysis demonstrates how adjustment costs can generate oil and gas forward price dynamics with two factors, consistent with the behavior these commodities exhibit in the Schwartz and Smith (2000) calibration. Our two‐factor model predicts that stochastic volatility will arise in these markets as a natural consequence of production adjustments, however, and we provide supporting empirical evidence. Differences between endogenous price processes from our general equilibrium model and exogenous processes in earlier papers can generate significant differences in both financial and real option values.