Measuring Economies of Scale and Scope in Agricultural Banking

Abstract

Generally, empirical studies have used either duality theory with the estimation of cost functions or nonparametric estimation methods to assess efficiency in the financial services industry. The purpose of the present study is to estimate economies of scope and scale in agricultural banking. This will be accomplished through estimation of an indirect multi-product cost function. The uniqueness of this study, when compared to previous studies of efficiency of the financial services industry, is the disaggregation of the outputs so that agricultural lending can be evaluated. In addition, a normalized quadratic cost function is estimated with curvature properties imposed. Clark reviewed thirteen studies that measured economies of scope and scale for commercial banks, credit unions, and savings and loan associations. He found that they offered four broad conclusions: (a) overall economies of scale exist at low levels of input, (b) no consistent evid nce of economies of scope exists, (c) some evidence of cost complementarities exists, and (d) the results seem to be robust among financial institutions.