Banking technology and the existence of a consistent output aggregate

Abstract

This paper addresses the question of the existence of a consistent output aggregate in banking. Specific, necessary and sufficient conditions for output aggregation are developed and tested in the context of a second-order approximation to any arbitrary multi-product bank cost function. The analysis provides evidence that a composite (aggregate) measure of output fails to provide a proper representation of banking technology and therefore previous studies that used aggregate output measures may well be subject to specification errors.