THE DOMINANCE OF INEFFICIENCIES OVER SCALE AND PRODUCT MIX ECONOMIES IN BANKING

This study measures and analyzes inefficiencies for all U.S. banks in 1984. Inefficiencies are measured relative to a 'thick frontier' cost function and are found to dominate measured scale and product mix economies. Most inefficiencies are operational in nature, involving the overuse of physical inputs, rather than financial, involving overpayment of interest. Also, technical inefficiencies (proportionate overuse of all inputs) dominate allocative inefficiencies (improper mix of inputs). These results suggest that competitive pressures in banking from deregulation will be focused primarily on banks that do not control costs, rather than on those of a particular size or product mix. © 1991.