The diffusion of production processes in the U.S. banking industry: A finite mixture approach

Abstract

This article applies finite mixture distributions to the estimation of cost functions for financial firms through time. The mixture approach allows the estimation of multiple technologies when firms' technology choices are unobservable. Technology switching (‘diffusion’) and underlying technical change are simultaneously evaluated. An application to large samples of U.S. banks for the years 1982–1986 illustrates the approach. Results suggest banks switch to lower cost production technologies when unburdened by strict branching regulations.