Scale Economies, Scope Economies, and Technical Change in Federal Reserve Payment Processing

Abstract

In the past decade, the U.S. economy has witnessed a tremendous surge in the usage of electronic payment processing services and an increased importance of the firms that provide these services. In this paper,we estimate scale economies, scope economies, and technical change in the Federal Reserve's provision of payments processing from 1990 to 2000. We find considerable scale economies and evidence of some scope economies for the provision of automated clearinghouse, Fedwire, and Book-Entry services no matter whether we specify a separable quadratic or a translog cost function. In addition, we find that disembodied technical change also contributed to the overall reduction in costs throughout the 1990s.