An Examination of Cost Subadditivity and Multiproduct Production in Large U.S. Banks

This paper examines the subadditivity of costs for a sample of the largest commercial banks in the U.S. We introduce into the bank production literature the grid approach developed by Evans and Heckman (1984). We estimate two models of the bank cost function - one where deposits are treated as outputs, while in the other, deposits are treated as inputs. The models are estimated using the commonly used translog and the more flexible minflex Laurent. Viewed narrowly, the findings imply that cost complementarities are not the raison d'etre for multiproduct production in the largest commercial banks. Subadditive costs, however, are sufficient but not necessary for multiproduct production. It is quite possible for multiproduct production to be optimal when outputs are produced independently (Levy and Haber 1986, and Teece 1980, 1982). It is only required that inputs be sharable as opposed to joint. (Printed by permission of the publisher.)