Journal of Business & Economic Policy

ISSN 2375-0766 (Print), 2375-0774 (Online) DOI: 10.30845/jbep

Missing Output, User Cost Scale Economies, and Incentives to Merge
David Humphrey

Spreading costs over a larger output is an important incentive to merge. Many banking scale studies may underestimate these benefits. We compute user cost scale economies, an approach consistent with how banking is treated in the national accounts. Banking outputs missing from academic studies are included and output is measured as value added. Our results are compared with a standard approach to scale measurement using balance sheet values. Scale effects for five major banking services are also noted. User cost scale economies are more closely associated with underlying costs by including missing output and reducing collinearity among service line outputs. This improves local identification of bank scale effects. (108 words)

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