The Contribution of Physical, Information Technology and Advertising Capital to Output and Value of Bank Services

Abstract

From Spanish bank level data for the period 1983 to 2003, this paper provides evidence on the contribution of banks' inputs to the output and the demand of banking services. Particularly, the paper studies the role played by labour, physical capital (investment per branch and number of branches) and advertising capital on the demand and supply side of banking services. As well as productive inputs, we introduce the concept of value-enhancing inputs to refer to those inputs that increase the value of banking services for costumers (demand effect). The empirical findings of this paper show that banks produce their output at branch level through the combination of services from labour and from IT capital under a constant-returns-to-scale production function. The output from labour and IT capital cannot be expanded beyond the fixed capacity of the branch which, in turn, requires a fixed investment per branch (Leontieff production function). The output and inputs at bank level are just the product of output/inputs per branch times the number of branches. The results also point that the representative branch of banks does not operate at full capacity, but banks seem to open branches according to the profit maximizing conditions of marginal return equal to marginal cost of the investment. On the other hand, advertising capital acts increasing the demand of loans and the supply of deposits for a given interest rate. Furthermore, the estimations of the demand functions of services provide estimates of the price elasticity of loans and deposits. The empirical estimation of the production and the demand functions has been performed using the so-called system-GMM estimator. This is a novel econometric technique developed to overcome the limitations of traditional econometric estimators with highly persistent data and, specifically, in production-function estimations (Blundell and Bond (1999)). Overall, the estimated contribution of all the inputs to the output of banks is just what it would be expected from the profit maximizing condition of marginal productivity equal to marginal cost. The evidence is that there are no over or under investment in capital inputs deployed by banks.