Multiproduct Cost Modelling of Canadian Trust Companies

Abstract

<p>The main objectives of this thesis are to develop and interpret an econometric model of the cost of operations of trust companies in Canada. A two-stage-model of production is set up. In the first stage of production labour and capital are used to service deposits. Thus deposits are intermediate outputs. In the second stage of production, labour, capital and deposits are used to produce the services of the management of estates, trusts and agencies, and of the management of loans and securities. Using duality techniques, a cost function corresponding to the final-stage production transformation function is formulated. Two sets of data are employed in the empirical analyses. The first data set consists of trust companies operating in Ontario in the period 1976-1981, omitting only a few whose circumstances were obviously quite unusual, as evidenced by inordinately low labour-shares. The second data set is a truncated form of the first data set -- it includes only observations with no zero outputs. The cost function was specified as a generalized translog function, but for purposes of comparison with earlier studies, an ordinary translog cost function was also specified and estimated. The cost function was in both cases estimated together with the labour-share equation as a system of seemingly unrelated simultaneous equations. Parameters obtained from the estimated cost functions were used to evaluate measures of economies of scale, economies of scope, and product-specific economies of scale. Some of the results obtained are comparable to earlier studies. For example, this study found an inverse relation between asset size and scale-economies. Some new results also emerged, especially relating to economies of scope: it was found that there exists a positive relation between scope-economies and amalgamations of firms.</p>