Technical Change, Organizational Form, and the Structure of Bank Production

Abstract

OF THOSE TECHNOLOGICAL CHARACTERISTICS RELATED TO the nature of competition among firms in an industry or market, scale economies and technical change are especially important. Economies of scale are said to exist when an equiproportional increase in all inputs results in a greater than proportional increase in output or equivalently when an increase in output at constant input prices leads to a less than proportional increase in total costs. Thus, average costs decline as output expands. Depending upon the extent to which costs decline as output increases, regulation of the firms in the industry may be necessary.l The literature analyzing scale economies in commercial banking is voluminous. The early studies on scale economies in banking include those by Benston (1965, 1972), Greenbaum (1967), Murphy (1972), and Bell and Murphy (1968). More recent studies include those by Benston, Hanweck, and Humphrey (1982) and Clark (1984).2 This literature has established that mild scale economies exist in bank