Returns to scale at large banks in the US: A random coefficient stochastic frontier approach |
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| Affiliation: | 1. Department of Economics, The University of North Texas, Denton, TX 76201, USA;2. School of Management and Governance, Murdoch University, Western Australia 6150, Australia;1. School of Management, Beijing Normal University Zhuhai, Zhuhai City 519087, China;2. Department of Money and Banking, National Chengchi University, Taipei City 11605, Taiwan;1. Economics Department, Lancaster University Management School, LA1 4YX, United Kingdom;2. Isenberg School of Management, University of Massachusetts-Amherst, 90 Campus Center Way, 209A Flint Lab, Amherst, MA 01003, United States;3. The University of Kent, Kent Business School, Canterbury, Kent, United Kingdom;1. University of Liège, HEC – Management School, Belgium;2. EDHEC Business School, Lille-Nice, France;3. Haute Ecole Fr. Ferrer, Brussels, Belgium;4. Maastricht University, School of Business and Economics, Maastricht, The Netherlands;5. Gambit Financial Solutions, Belgium;1. Michigan State University, USA;2. University of Sydney, Australia |
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| Abstract: | This paper investigates the returns to scale of large banks in the US over the period 1997–2010. This investigation is performed by estimating a random coefficient stochastic distance frontier model in the spirit of Tsionas (2002) and Greene (2005, 2008). The primary advantage of this model is that its coefficients can vary across banks, thereby allowing for unobserved technology heterogeneity among large banks in the US We find that failure to consider unobserved technology heterogeneity results in a misleading ranking of banks and mismeasured returns to scale. Our results show that the majority of large banks in the US exhibit constant returns to scale. In addition, our results suggest that banks of the same size can have different levels of returns to scale and there is no clear pattern among large banks in the US concerning the relationship between asset size and returns to scale, due to the presence of technology heterogeneity. |
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| Keywords: | Returns to scale Random coefficient stochastic distance frontier model Bayesian estimation |
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