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REGIONAL ECONOMIC ISSUES Working Paper Series Regional Regulatory Effects on Bank Efficiency Douglas D. Evanoff and Philip R. Israilevich FEDERAL RESERVE BANK OF CHICAGO WP- 1990/4 Regional Regulatory Effects On Bank Efficiency D. D. Evanoff and RR. Israilevich* 1. Introduction Although economists have recognized the importance of regional variations in production processes [Samuelson (1952), Arrow, Chenery, Minhas and Solow (1961), Lande (1978), Luger and Evans (1988)], they have generally been ignored in analysis of the banking industry. This is particularly surprising given the per ceived important role of banking in influencing real economic activity and regional growth [Cameron, et al (1967), Bemake (1981,1983), Calomiris, et al (1986), and Williamson (1987)]. As a result of this role the industry has been subject to signif icant regulation to insure that consumers receive adequate banking services. Thus, in addition to differing production technologies, regional differences may also re sult from alterations to the production process induced by regulatory constraints. This study provides evidence of regional variations in production characteristics for large commercial banks. Additionally, differences resulting from regulatory constraints are found. The presence of regional variations from either of these dimensions of production renders the national model — a special case of the multiregional model — used in previous bank cost studies inappropriate.1 2. Regional Production Differences: Technology, Binding Regulation, and Inefficiencies There are numerous reasons for expecting regional differences in production pro cesses. In addition to input price differences, unique regional technologies can result from differing regional environments. These may result from institutional arrangements, legal environments, or management-labor relationships (Luger and Evans). Regulation is very influential in banking and can also be expected to have a signif icant influence on the production process. Banks are regulated in nearly all aspects of the product including price constraints, product restrictions, promotional limi tations, and distribution restrictions. Although intended to improve welfare, and the proposed benefits are obvious, there are also costs associated with regulation which are not as evident and are commonly ignored. For example, price restric tions on deposits may be imposed to provide banks with an inexpensive source * The authors are economists at the Federal Reserve Bank of Chicago. Individually they are also associ ated with DePaul University and University o f Illinois-Urban a, respectively. Excellent data assistance by Betsy Dale is acknowledged. The views expressed are solely those o f the authors. F R B C H IC A G O Working Paper March 1990, WP-1990-4 1 of funds; however, evidence suggests they result in disintermediation, and nonpecuniary costs aimed at circumventing the restrictions [e.g., Startz (1979), Pyle (1974)]. Entry barriers and distribution restrictions may be implemented to insure that local market participants are not forced from the market as a result of ’’ex cessive” competition; however, evidence suggests this results in inferior service levels, entry deterance behavior via space packing, and excessive investments in physical capital [(e.g., Baer, et al (1988), Evanoff (1988)]. It is important that these regulatory induced distortions also be accounted for. Although the basic regulatory framework for banks is established at the federal level, much is left to the discretion of the states, e.g., branching guidelines, allow able organizational structures and usury laws.2 These differences in state regula tions can obviously affect the degree of bank competitiveness. We account for the extent of regulatory induced distortions at the regional level. The potential interaction between technology and regulatory differences creates an array of potential effects on costs. Obviously we can test directly for technology and/or regulatory differences. However, additional possibilities occur because of their interaction. Differences in the estimated effect of regulation between regions may partially be due to the technological differences. That is, although the regula tory distortion to factor prices is the same, the impact on costs may differ across re gions because different shaped isoquants exist. Therefore the question of whether the effect of regulation is different across regions should be addressed under the condition that the estimated technology is the same. Analogously, questions about differences in regional technologies should be addressed assuming equal distor tions from the regulatory process. To evaluate regional cost differences, four models are employed. The first model is the most general allowing regional variations in both production technologies and regulatory stringency. The remaining three models are nested within this most general one. The second model allows for variations in regional technologies, but restricts the regulatory effects in both regions to be the same. The third model allows for regional variations in regulatory effects, but imposes equivalent regional technologies. The last, and most restrictive model, is the conventional national model in which both technologies and regulatory constraints are assumed to be the same across regions.3 Three tests are performed with the four models. In each, the more restrictive mod els are compared to the most general model. These tests are summarized in Table 1, where C denotes the set of cost function parameters, and subscripts identify the set of restrictions imposed on parameters — with R and T denoting two subsets of regulatory and technology related parameters, respectively. Regional parameters F R B C H IC A G O Working Paper March 1990, WP-1990-4 2 Table 1 Tests For Regulatory and Technology Differences Across Regions Test 1 Test 2 Test 3 C R m+RrOTm*Tr - s A C Rm*R,<JTm*Tt - C R mmRry JT ^T T ~ I h C Rm*R,UTm*T, - C*„*Rr 7 W V = D 2 u are denoted for two regions by the subscripts m and r. Differences in the cost functions are denoted as A . In the first test, the most general model, in which both regulation and technology are allowed to vary across regions (i.e., CRm *Rrurm *T,)> is compared to the most restrictive model in which each region is restricted to have the same coefficients, i.e., the national model (CRmRrurm = -rr)- If the difference between these two models is insignificant then both technology and regulatory effects do not have regional variations and use of the standard national model can not be considered inappro priate. In the second test the most general model is compared to one with identical regional regulatory effects, but with variations in technology as implied by the most general model. If the difference between these two models is insignificant then regional variations in technological characteristics can not be considered significant Test 3 compares the most general model to one with identical regional technolo gies but different regulatory effects as implied by the more general model. An insignificant difference between these two models would imply insignificant re gional variations in regulatory distortions. 3. Bank Cost M odels and Empirical Specification In this section we introduce the models to be compared. We utilize a methodol ogy developed by Lau and Yotopoulos (1971), and Atkinson and Halvorsen (here after AH, 1980). The methodology has been employed in previous studies to ac count for regulatory induced market distortions, e.g., AH (1984), Israilevich and Kowalewski (1987), and Evanoff, Israilevich, and Merris (1989). The reader is referred to these studies for a detailed discussion of the methodology. From the first-order conditions for cost minimization in the neoclassical model, the marginal rate of technical substitution between inputs is equal to the ratio of the prices of the inputs. Given input prices, and the predetermined level of output as F R B C H IC A G O Working Paper March 1990, W P-1990-4 3 the only constraint, the optimal combination of inputs can be derived to minimize costs. However, if additional (regulatory) constraints exist they need to be accounted for in the optimization process. From the first-order conditions for cost minimization, the marginal rate of technical substitution between the inputs should be equal to the ratio of the effective prices of the inputs. It is these effective or shadow prices of the inputs which are influenced by the additional constraints. In the absence of binding regulatory constraints, shadow and actual prices are equal and the first order condition reduces to the standard neoclassical condition. This special case is nested within the more general Shadow-Price (SP) Model. Since the shadow prices of the inputs are not directly observable, following Lau and Yotopoulos, and AH they are approximated by (1) P* = kiPi for i = 1...... m where P, and P* are market and shadow input prices, respectively, and is an input-specific factor of proportionality; again, when regulation is nonbinding, all shadow prices equal the respective market prices, ki = 1 for all i, and the shadow cost function reduces to the more restricted function. Applying Shephard’s Lemma (1970) to the more general Shadow Cost function the input demand functions can be obtained, from which the actual or observed cost and factor share equations can be derived.4 (2) InC4 = lnCs + l n ^ 1=1 k i and () 3 P iXi MfkJ1 . . , M f = ------- ------ —— y. for i = 1,... ,m cA e :=i ^ where CA and Cs are actual and shadow cost, respectively; and M f and Aff are actual and shadow factor-cost shares, respectively. Equations 2 and 3 comprise our most restrictive model where both technology and regulatory impacts are constant across regions. The shadow cost function is a more comprehensive representation of costs to be minimized and is the appropriate dual to the production process. It allows one to calculate the optimal (unobserved) input combination given observed prices. This combination is relevant for measuring the cost differences resulting from produc tion under competitive conditions and those under binding regulatory constraints. F R B C H IC A G O Working Paper March 1990, WP-1990-4 4 Correspondingly, differences in CA computed with P and P* measure the cost of the binding constraints, or, stated differently, the extent of production inefficiency produced by regulation. We employ this procedure in our comparison of distor tions induced by regulation on our cost models. In applying the Shadow-Price Model to large U.S. banks, the following empirical specifications are adopted: (1) Z is specified to account for exogenous variables pertinent to banking including the number of bank offices, B\ holding company structure, H\ and technological change, T. (2) Banks produce a single output, Q, by utilizing two inputs: labor and capital. (3) The shadow cost function is specified in translog form. Total shadow cost is specified as linearly homogenous in shadow prices. (4) The shadow price factors, ki for (i = L, K ), are specifed as input specific but as identical across banking firms.5 The shadow price factor for labor, kLt is set equal to unity and the shadow price factor for capital, fo, is estimated. The absolute values of kt and cannot be estimated, given that the equations for total actual cost and factor cost shares are homogeneous of degree zero in kL and fa. Therefore, we test for relative price efficiency only (kL = not absolute efficiency. The total shadow cost function in translog form is lnCs = a 0 + Pe lnQ + 0.5peG(ln Q f + i yiQIn Q In(*,/>,) + £ > In(*,/>;) i +05 J 2 E Y W W i ) W k jP j) + f I T + y an O.SforQn T)2 * j + Q In Q In T + V yiT In(fc.POIn T + pBInB + 0.5pB (ln B ? qt B () 4 « + yoe In Q In B + J tb In Tin B + ^ yiB In(IqPi) InB + phH i + yhqH In 2 + ym H In T + yHBH lnB + ln(*;/>,)// for i,j = L,K where yuc = Yk l - Linear homogeneity in shadow prices implies the following adding-up restrictions on parameters: (5) £ p ;= land ^ Y i = ^Yifi = 5 Z ^ = IlY«H = 0^ Y y e i i i i i i = 0 for i,j = L,K F R B C H IC A G O Working Paper March 1990, W P-1990-4 5 Shadow cost shares for the translog specification are derived by logarithmic dif ferentiation of 0s in equation 4: A f= / ainC5 ainfcPi) =P + T eI Q , i n ( 6) + Y 2 lijW k jP j )+ Y r nr+Y BI B + yihH iI i n j for i,j = L, K From equations 1,4, and 6 , total actual costs are I & = I C5+ I n n n [,+ £ Y I (W) + Yg I Q p vn n ^ Y TI T + ^ Yf I B + X] . n il n i i i ) / for i,j = L,K where In Cs is given in equation 4. The derived actual cost shares are given by M f = P1 + £ (8) E Y In(kjPf) + Ye I" 6 + Y In T+YiB InB + ymH k j1+ iv t P + E T ln(-kjPj) + Y GI Q + Y TI T + Yb I B + y^ H < v < n . n n -1 k'; for i j = L,K. Equation 7 and one of the share equations 8 , appended with classical additive dis turbance terms, is the set of equations to be jointly estimated as our restricted national model. Because of the singularity of the variance-covariance matrix of the error terms resulting from the adding-up conditions on the share equations, we arbitrarily drop the capital-share equation. The empirical results are invariant to the choice of the factor share deleted and to the normalization, kt = 1 , for the labor shadow-price factor. We adjust the national model to generate the other three models discussed in Sec tion 2. Regional regulatory differences can be accounted for by including an ad ditive binary variable on fo. Negative values for this additive term would indicate F R B C H IC A G O Working Paper March 1990, W P-1990-4 6 additional regulatory induced price distortions in the specified region. Differences in technology across regions can be accounted for by including binaries on all the exogeneous variables except Our most general model accounts for differences in both dimensions. Data The model was estimated for a panel data set for the years 1972-87 for the largest banks in the U.S. which were members of a holding company over the entire pe riod. The final data set consisted of 164 banks and 2,624 observations. Two regions were considered: the Midwest, MW, and the rest of the U.S., RN.6 The Midwest was chosen because of a priori information suggesting that the bank ing environment may be unique in this region. First, a large portion of the banks in this area operate under very restrictive state-imposed limitations to geographic expansion. Second, there is a preponderance of small, state-chartered banks in this region providing the potential for a strong lobbying group and restrictive regula tory environment Third, the region is somewhat unique in its regional economic base, i.e., concentrated in heavy industry such as the steel and automotive indus tries. Thus, the banking environment in the Midwest may differ from that in other areas. For banks located in this region the binary variable was set equal to one; zero otherwise. The Federal Reserve Call Report was the major data source. Costs were defined as the sum of expenditures on labor and physical capital. Bank output was defined as the dollar value of loans and investment securities.7 The number of banking offices was also taken from the Call Report as was the type of bank holding com pany organization. Technical progress was accounted for with a time trend. The input price for labor was obtained from the Bureau of Labor Statistics. State level wage trends were collected for each year and assigned to each bank according to the location of its home office. The price of physical capital was approximated from Call Report data as the ratio of physical capital expenditures measured as additions to plant and equipment, furniture, and physical premises, to the book value of net bank premises, furniture, and physical equipment 4. Empirical Results Estimates were derived using the iterated seemingly unrelated regression tech nique. Results for the most general model are presented in Table 2. A cursory review of the results suggest that the banks in the two regions have different pro duction technologies. They also suggest that regulation distorts the effective price of physical capital downward; moreso in the MW than in the RN.8 F R B C H IC A G O Working Paper March 1990, WP-1990-4 7 Table 2 Estimation Results For the Most General Model: CRm¥RrvTm*Tr Coefficients C to h Pq Pee P* pfifi PH 111 Jl q 1LB yw Qq b Qq h Ob h Qq t Q tb O th < 1 >T <>T tT Jlt kK 8K Two Regions: kR for RN and (kg+ gic) for MW MW RN 2.623 0.683 0.045 0.056 0.143 0.003 -0.219 0.033 0.005 0.0004 -0.001 -0.001 0.047 -0.079 0.006 0.004 -0.082 0.136 -0.234 -0.014 0.555 N.A. (2.51) (21.49) (0.28) (4.48) (1.97) (0.39) (1.10) (9.25) (5.63) (0.99) (0.98) (0.24) (2.82) (5.93) (0.53) (0.53) (4.19) (0.96) (9.92) (8.16) (5.68) -15.194 0.809 2.627 -0.130 -0.307 0.038 1.788 0.020 0.002 -0.002 -0.002 0.016 -0.107 -0.101 0.128 -0.004 0.009 -1.548 -0.289 -0.002 0.555 -0.278 (6.47) (10.57) (7.69) (5.24) (1.39) (1.45) (3.92) (2.27) (1.66) (1.77) (0.82) (0.87) (3.03) (4.13) (4.41) (0.28) (0.21) (4.28) (5.73) (1.18) (5.68) (1.70) Absolute /-values are in parenthesis. The / value for the kg coefficient was calculated under the hypothesis of kR = 1. Likelihood ratio tests were used to perform the tests introduced in Section 2, i.e., Table 1. Test results suggests a very significant difference between the most re strictive and general models, i.e., Test 1. The likelihood ratio test statistic was 328 and the critical chi-square value at the two-percent siginificance level is 36.3. Therefore the appropriateness of a national model for the sample of banks consid ered is rejected. F R B C H IC A G O Working Paper March 1990, WP-1990-4 8 However, the source of the difference cannot be determined from Test 1. It can result from different technologies, different regulatory-induced price distortions, or both. Results for Test 2 and Test 3 indicate that both forces are operative and important For each test the more restrictive cost model was rejected at the twopercent significance level.9 Therefore the results suggest significant technological differences and significant and unique regulatory distortions across the two regions. We calculate the level of inefficiency for each region at the mean using the most general model. We compare the predicted costs based on the estimated level of distortion (i.e., the predicted k and g parameters) with that found when the distortion is assumed not to exist (i.e., g = 0 and k = 1). The mean level of inefficiency in RN was calculated to be 1.9 percent, while in the MW it was 7.1 percent. The difference in efficiency is con sistent with the estimated differences in regulatory-induced price distortions, i.e., g < 0. Thus, regulation specific to the MW apparently causes greater input price distortions which, in turn, leads to greater inefficiency for MW banks. Again, this is in agreement with our expectations and indicates that regulation more adversely effects production in the MW. There is an additional dimension of the regional production process which our results allow us to analyze. Our findings indicate that banks located in the MW are more adversely affected by regulation — realizing that levels of regulation can differ across regions. Using these estimates we can simulate how production efficiency would be affected if regional regulatory distortions were varied. That is, how does the production technology of banks in a particular region allow them to respond to changes in regulation. To determine this we generated predicted values for inefficiency in each region by altering the regulatory-induced price distortions and comparing them to the costs found when price efficiency was assumed (i.e., k K = 1 , g K = 0 ). Our results suggest that banks located in the MW region are in a better position to bear the burden of regulation. Simulations imposing gK = 0 on MW observations produced a 1.4% mean level of inefficiency for these banks; less than the 1.9% level for banks in the RN. Similarly, imposing the estimated kK and gK parame ters on the RN banks produced cost inefficiencies of 9.5%; compared to 7.1% for the MW banks. Results for alternative price distortions were simulated and are summarized in Figure 1. They suggests that the MW banks, burdened by more stringent regulation, may have adjusted their production technique to minimize the regulatory effect Thus, ceteris paribus, relaxation of certain restrictions may have a greater beneficial impact on banks located in this region. F R B C H IC A G O Working Paper March 1990, W P-1990-4 9 Figure 1 Simulated Levels of Bank Production Inefficiency. F R B C H IC A G O Working Paper March 1990, WP-1990-4 10 5. Conclusion Although it is generally recognized that potential differences exist in regional pro duction technologies and the extent of regulatory stringency, studies of bank costs have ignored these differences. This omission is somewhat perplexing given the important role assigned to banking in regional development Using data defini tions and measures utilized in previous bank cost studies we compare the Mid western states of the U.S. to the rest of the nation and find significant differences in bank technologies and allocative inefficiency. Banks located in the Midwest, a region where regulatory stringency appears to be somewhat greater, were found to be more adversely affected by regulation. However, apparent adjustments in their production technology have enabled them to be more resilient to regulatoryinduced distortions. Simulations imposing similar regulatory-induced factor price distortions on banks in the Midwest and in the rest of the nation suggested that the Midwest banks would be able to produce more efficiently under comparable regulatory conditions. The finding that bank production processes differ across regions has important pol icy implications. Ideally, given the perceived role of banking in regional devel opment, local legislators and regulators would realize the peculiarities of the local production process and respond by providing incentives to improve productivity — e.g., if the need is for the use of more advanced techniques, legislators could encourage advances in technological development, communication systems, capi tal flows, etc. Similarly, the finding that region specific regulations have adversely affected efficiency should encourage policy-setters to reevaluate regulations and, perhaps, to incorporate alternatives which have been found to be more conducive to productivity. Growth in the MW states has lagged behind the national growth rate during the observed period, thus, there may be some credence to the argument that banks influence regional grow. Stringent regulation could impair regional economic development.10 However, the findings may serve to reignite arguments over the proper extent of local control over bank regulation. Ever since a dual bank-chartering system de veloped in the U.S., both economists and bankers have been split over the proper role of federal and state legislatures. It has long been argued that bank regula tion has not been guided by efficiency concerns, but, rather, service accessibility and market protection from “unfair” competitive forces. In many cases this has served to preserve market power for incumbent banks. In most industries, a finding of differences in regional technologies would lead to recommendations for local regulatory control. This way the local governments could account for the local peculiarities and legislate accordingly. In banking, local regulations may actually be the root cause of the inefficiency problem. F R B C H IC A G O Working Paper March 1990, W P-1990-4 11 Footnotes 1. For a review of these studies see Gilbert (1984) or Hunter and Timme [here after HT (1986)]. There has been a differentiation in the literature between unit and branch banks, however none of the studies have attempted to account for regional differences resulting from regional specific technology or regulation. 2. Although some deregulation has occurred in banking, numerous restrictions remain and the industry is still recognized as being heavily regulated. 3. Actually, this “restrictive” model is more general than that used in nearly all previous bank cost studies which implicitly assume that regulation does not influence firm behavior, i.e., relative price efficiency exists (see Section 3). 4. Again, the reader is referred to AH (1984) or Evanoff, Israilevich, and Merris (1989). 5. To the extent that the firms evaluated are homogenous within the regions con sidered with respect to their technology and the burden of regulation, the re striction of identical fc values is appropriate. 6. Midwestern banks were considered those located in the states of Illinois, Indi ana, Iowa, Michigan, Minnesota, North Dakota, South Dakota, and Wisconsin. The results were robust with respect to minor adjustments to this definition — e.g., only banks within these states located in the Seventh or Ninth Federal Reserve Districts, etc. 7. Alternative balance sheet output measures were considered and produced sim ilar results. The lack of a consensus on the theory of banking renders the ap propriate bank output measure an unsettled issue. We are interested in the cost structure of large banks with special emphasis on regulatory distortions. For comparison purposes we use an output measure (as well as other variable mea sures) similar to that used by others evaluating these aspects of bank costs — e.g., HT, Shaffer (1985). Also, like HT, we assume that die production process of raising funds is separable. 8. Second order conditions are met globally for banks in the MW, and for fac tor shares less than 91% for RN banks. All of our observations have shares within this range. Estimates for the remaining three models, and more detailed statistical results, are available from the authors on request. 9. Derived likelihood-ratios for Test 2 and 3 were 1117.and 8.7, respectively, allowing us to reject the null that the models compared were equivalent for the number of restrictions imposed at the two percent level of significance. F R B C H IC A G O Working Paper March 1990, W P-1990-4 12 10. This is an important research topic for future analysis. While banks are ob viously not limited to making loans in their local markets, regulatory induced bank structure could influence loan-to-deposit ratios, the mix of specific types of loans, etc. While structure may not influence the flow of financial capital for the largest or second tier of borrowers, smaller businesses could be affected. F R B C H IC A G O Working Paper March 1990, WP-1990-4 13 References Arrow, Kenneth, H. Chenery, B. Minhas, and R. Solow (1961), “Capital-Labor Substitution and Economic Efficiency.” Review o f Economics and Statistics 43, August, 225-50. Atkinson, Scott E., and Robert Halvorsen (1984), “Parametric Efficiency Tests, Economies of Scale, and Input Demand in U.S. Electric Power Generation.” International Economic Review 25, October, 647-62. Atkinson, Scott E., and Robert Halvorsen (1980), “A Test of Relative and Abso lute Price Efficiency in Regulated Utilities.” The Review o f Economics and Statistics 62, February, 185-96. Baer, Herbert, Douglas Evanoff, Diana Fortier, and Larry Mote (1988), “Geo graphic Deregulation in Banking and the Public Interest.” Issues in Bank Regulation 11, Spring, 10-17. Bemake, Ben (1983), “Nonmonetary Effects of the Financial Crises in the Propa gation of the Great Depression.” American Economic Review 73, June, 25776. Bemake, Ben (1981), “Bankrupcy, Liquidity, and Recession.”American Economic Review 71, May, 155-59. Berger, Allen N., Gerald A. Hanweck, and David B. Humphrey (1987), “Com petitive Viability in Banking: Scale, Scope, and Product Mix Economies.” Journal o f Monetary Economics, December, 501-520. Calomiris, Charles, R. Glenn Hubbard, and James Stock (1986), “The Farm Debt Crisis and Public Policy.” Brookings Papers on Economic Activity 2,44185. Cameron, Rondo, Olga Crisp, Hugh Patrick, and Richard Tilly (1967), Banking in the Early Stages of Industrialization. New Yoik: Oxford University Press. Diewert, W. E. (1974), “Applications of Duality Theory” in M. Intriligator and D. Kendricks, (ed.), Frontiers in Quantitative Economics, Volume 2. Amster dam: North Holland. Evanoff, Douglas (1988), “Branch Banking and Service Accessibility.” Journal of Money, Credit, and Banking, May, 191-202. Evanoff, Douglas, Philip Israilevich, Randal Merris. (1989), “Technical Change, Regulation, and Economies of Scale for Large Commercial Banks: An Ap plication of a Modified Version of Shephard’s Lemma.” Federal Reserve Bank of Chicago Working Paper #1989-11. F R B C H IC A G O Working Paper March 1990, WP-1990-4 14 Gilbert, R. Alton. (1984), “Bank Market Structure and Competition.” Journal of Money, Credit, and Banking 16, November, 617-44. Hunter, William C., and Stephen G. Timme. (1986), ‘Technical Change, Organiza tion Form, and the Structure of Bank Production.”Journal of Money, Credit, and Banking 18, May, 152-66. Israilevich, Philip, and K. J. Kowalewski (1987), ‘The Effect of Regulation on Ohio Electric Utilities.” Federal Reserve Bank of Cleveland Economic Re view , 1st Quarter, 10-19. Jorgenson, Dale W. (1986), “Econometric Methods for Modeling Producer Behav ior” in Z. Griliches and M. D. Intriligator, (ed.), Handbook of Econometrics Volume III. Amsterdam: North Holland. Lande, Paul. (1978), “The Interregional Comparison of Production Functions.” Regional Science and Urban Economics 8, December, 339-53. Lau, L. J., and P. A. Yotopoulos (1971), “A Test For Relative Efficiency and Appli cation to Indian Agriculture.” American Economic Review 61, March, 94109. Luger, Michael, and William Evans (1988), “Geographic Differences in Produc tion Technology.”Regional Science and Urban Economics 18, August, 399424. Pyle, David H. (1974), “The Losses On Savings Deposits From Interest Rate Reg ulation.” Bell Journal of Economics and Management 5, Autumn, 614-22. Samuelson, Paul (1952), “A Comment on Factor Price Equalization.” Review of Economic Studies 19, 121-22. Shaffer, Sherrill (1985), “Competition, Economies of Scale, and Diversity of Firm Sizes.” Applied Economics 17, June, 467-76. Shephard, R. W. (1970), Theory of Cost and Production Functions.. Princeton: Princeton University Press. Solow, R. (1962), “Technical Progress, Capital Formation and Economic Growth.” American Economic Review 52, May, 76-86. Startz, R. (1979), “Implicit Interest and Demand Deposits.” Journal of Monetary Economics 5, October, 515-34. Williamson, Stephen D. (1987), “Financial Intermediation, Business Failures, and Real Business Cyles ” Journal of Political Economy 95, December, 1196— 1216. F R B C H IC A G O Working Paper March 1990, W P-1990-4 15 Federal Reserve Bank of Chicago RESEARCH STAFF MEMORANDA, WORKING PAPERS AND STAFF STUDIES The following lists papers developed in recent years by the Bank’s research staff. Copies of those materials that are currently available can be obtained by contacting the Public Information Center (312) 322-5111. Working Paper Series— series of research studies on regional economic issues relating to the Sev A enth Federal Reserve District, and on financial and economic topics. Regional Economic Issues *WP-82-l Donna Craig Vandenbrink “The Effects of Usury Ceilings: the Economic Evidence,” 1982 David R. Allardice “Small Issue Industrial Revenue Bond Financing in the Seventh Federal Reserve District,” 1982 WP-83-1 William A. Testa “Natural Gas Policy and the Midwest Region,” 1983 WP-86-1 Diane F. Siegel William A. Testa “Taxation of Public Utilities Sales: State Practices and the Illinois Experience” WP-87-1 Alenka S. Giese William A. Testa “Measuring Regional Fligh Tech Activity with Occupational Data” WP-87-2 Robert H. Schnorbus Philip R. Israilevich “Alternative Approaches to Analysis of Total Factor Productivity at the Plant Level” WP-87-3 Alenka S. Giese William A. Testa “Industrial R&D An Analysis of the Chicago Area” WP-89-1 William A. Testa “Metro Area Growth from 1976 to 1985: Theory and Evidence” WP-89-2 William A. Testa Natalie A. Davila “Unemployment Insurance: A State Economic Development Perspective” WP-89-3 Alenka S. Giese “A Window of Opportunity Opens for Regional Economic Analysis: BEA Release Gross State Product Data” WP-89-4 Philip R. Israilevich William A. Testa “Determining Manufacturing Output for States and Regions” WP-89-5 Alenka S.Geise “The Opening of Midwest Manufacturing to Foreign Companies: The Influx of Foreign Direct Investment” WP-89-6 Alenka S. Giese Robert H. Schnorbus “A New Approach to Regional Capital Stock Estimation: Measurement and Performance” **WP-82-2 *Limited quantity available. **Out of print. Working Paper Series (cont'd) WP-89-7 William A. Testa “Why has Illinois Manufacturing Fallen Behind the Region?” WP-89-8 Alenka S. Giese William A. Testa “Regional Specialization and Technology in Manufacturing” WP-89-9 Christopher Erceg Philip R. Israilevich Robert H. Schnorbus “Theory and Evidence of Two Competitive Price Mechanisms for Steel” WP-89-10 David R. Allardice William A. Testa “Regional Energy Costs and Business Siting Decisions: An Illinois Perspective” WP-89-21 William A. Testa “Manufacturing’s Changeover to Services in the Great Lakes Economy” WP-90-1 P.R. Israilevich “Construction of Input-Output Coefficients with Flexible Functional Forms” WP-90-4 Douglas D. Evanoff Philip R. Israilevich “Regional Regulatory Effects on Bank Efficiency” Issues in Financial Regulation WP-89-11 Douglas D. Evanoff Philip R. Israilevich Randall C. Merris “Technical Change, Regulation, and Economies of Scale for Large Commercial Banks: An Application of a Modified Version of Shepard’s Lemma” WP-89-12 Douglas D. Evanoff “Reserve Account Management Behavior: Impact of the Reserve Accounting Scheme and Carry Forward Provision” WP-89-14 George G. Kaufman “Are Some Banks too Large to Fail? Myth and Reality” WP-89-16 Ramon P. De Gennaro James T. Moser “Variability and Stationarity of Term Premia” WP-89-17 Thomas Mondschean “A Model of Borrowing and Lending with Fixed and Variable Interest Rates” WP-89-18 Charles W. Calomiris “Do "Vulnerable" Economies Need Deposit Insurance?: Lessons from the U.S. Agricultural Boom and Bust of the 1920s” WP-89-23 George G. Kaufman “The Savings and Loan Rescue of 1989: Causes and Perspective” WP-89-24 Elijah Brewer III “The Impact of Deposit Insurance on S&L Shareholders’ Risk/Return Trade-offs” *Limited quantity available. **Out of print. 3 Working Paper Series (cont'd) Macro Economic Issues WP-89-13 David A. Aschauer “Back of the G-7 Pack: Public Investment and Productivity Growth in the Group of Seven” WP-89-15 Kenneth N. Kuttner “Monetary and Non-Monetary Sources of Inflation: An Error Correction Analysis” WP-89-19 Ellen R. Rissman “Trade Policy and Union Wage Dynamics” WP-89-20 Bruce C. Petersen William A. Strauss “Investment Cyclicality in Manufacturing Industries” WP-89-22 Prakash Loungani Richard Rogerson Yang-Hoon Sonn “Labor Mobility, Unemployment and Sectoral Shifts: Evidence from Micro Data” WP-90-2 Lawrence J. Christiano Martin Eichenbaum “Unit Roots in Real GNP: Do We Know, and Do We Care?” WP-90-3 Steven Strongin Vefa Tarhan “Money Supply Announcements and the Market’s Perception of Federal Reserve Policy” ♦Limited quantity available. **Out o f print. 4 Staff Memoranda— series of research papers in draft form prepared by members of the Research A Department and distributed to the academic community for review and comment. (Series discon tinued in December, 1988. Later works appear in working paper series). **SM-81-2 George G. Kaufman “Impact of Deregulation on the Mortgage Market,” 1981 **SM-81-3 Alan K. Reichert “An Examination of the Conceptual Issues Involved in Developing Credit Scoring Models in the Consumer Lending Field,” 1981 Robert D. Laurent “A Critique of the Federal Reserve's New Operating Procedure,” 1981 George G. Kaufman “Banking as a Line of Commerce: The Changing Competitive Environment,” 1981 SM-82-1 Harvey Rosenblum “Deposit Strategies of Minimizing the Interest Rate Risk Exposure of S&Ls,” 1982 *SM-82-2 George Kaufman Larry Mote Harvey Rosenblum “Implications of Deregulation for Product Lines and Geographical Markets of Financial Instititions,” 1982 *SM-82-3 George G. Kaufman “The Fed’s Post-October 1979 Technical Operating Procedures: Reduced Ability to Control Money,” 1982 SM-83-1 John J. Di Clemente “The Meeting of Passion and Intellect: A History of the term ‘Bank’ in the Bank Holding Company Act,” 1983 SM-83-2 Robert D. Laurent “Comparing Alternative Replacements for Lagged Reserves: Why Settle for a Poor Third Best?” 1983 **SM-83-3 G. O. Bierwag George G. Kaufman “A Proposal for Federal Deposit Insurance with Risk Sensitive Premiums,” 1983 ♦SM-83-4 Henry N. Goldstein Stephen E. Haynes “A Critical Appraisal of McKinnon’s World Money Supply Hypothesis,” 1983 SM-83-5 George Kaufman Larry Mote Harvey Rosenblum “The Future of Commercial Banks in the Financial Services Industry,” 1983 SM-83-6 Vefa Tarhan “Bank Reserve Adjustment Process and the Use of Reserve Carryover Provision and the Implications of the Proposed Accounting Regime,” 1983 SM-83-7 John J. Di Clemente “The Inclusion of Thrifts in Bank Merger Analysis,” 1983 SM-84-1 Harvey Rosenblum Christine Pavel “Financial Services in Transition: The Effects of Nonbank Competitors,” 1984 SM-81-4 **SM-81-5 ♦Limited quantity available. ♦♦Out o f print. Staff Memoranda (cont'd) SM-84-2 George G. Kaufman “The Securities Activities of Commercial Banks,” 1984 SM-84-3 George G. Kaufman Larry Mote Harvey Rosenblum “Consequences of Deregulation for Commercial Banking” SM-84-4 George G. Kaufman “The Role of Traditional Mortgage Lenders in Future Mortgage Lending: Problems and Prospects” SM-84-5 Robert D. Laurent “The Problems of Monetary Control Under Quasi-Contemporaneous Reserves” SM-85-1 Harvey Rosenblum M. Kathleen O’Brien John J. Di Clemente “On Banks, Nonbanks, and Overlapping Markets: A Reassessment of Commercial Banking as a Line of Commerce” SM-85-2 Thomas G. Fischer William H. Gram George G. Kaufman Larry R. Mote “The Securities Activities of Commercial Banks: A Legal and Economic Analysis” SM-85-3 George G. Kaufman “Implications of Large Bank Problems and Insolvencies for the Banking System and Economic Policy” SM-85-4 Elijah Brewer, III “The Impact of Deregulation on The True Cost of Savings Deposits: Evidence From Illinois and Wisconsin Savings & Loan Association” SM-85-5 Christine Pavel Harvey Rosenblum “Financial Darwinism: Nonbanks— and Banks— Surviving” Are SM-85-6 G. D. Koppenhaver “Variable-Rate Loan Commitments, Deposit Withdrawal Risk, and Anticipatory Hedging” SM-85-7 G. D. Koppenhaver “A Note on Managing Deposit Flows With Cash and Futures Market Decisions” SM-85-8 G. D. Koppenhaver “Regulating Financial Intermediary Use of Futures and Option Contracts: Policies and Issues” SM-85-9 Douglas D. Evanoff “The Impact of Branch Banking on Service Accessibility” SM-86-1 George J. Benston George G. Kaufman “Risks and Failures in Banking: Overview, History, and Evaluation” SM-86-2 David Alan Aschauer “The Equilibrium Approach to Fiscal Policy” *Limited quantity available. **Out of print. Staff Memoranda (cont'd) SM-86-3 George G. Kaufman “Banking Risk in Historical Perspective'’ SM-86-4 Elijah Brewer III Cheng Few Lee “The Impact of Market, Industry, and Interest Rate Risks on Bank Stock Returns” SM-87-1 Ellen R. Rissman “Wage Growth and Sectoral Shifts: New Evidence on the Stability of the Phillips Curve” SM-87-2 Randall C. Merris “Testing Stock-Adjustment Specifications and Other Restrictions on Money Demand Equations” SM-87-3 George G. Kaufman “The Truth About Bank Runs” SM-87-4 Gary D. Koppenhaver Roger Stover “On The Relationship Between Standby Letters of Credit and Bank Capital” SM-87-5 Gary D. Koppenhaver Cheng F. Lee “Alternative Instruments for Hedging Inflation Risk in the Banking Industry” SM-87-6 Gary D. Koppenhaver “The Effects of Regulation on Bank Participation in the Market” SM-87-7 Vefa Tarhan “Bank Stock Valuation: Does Maturity Gap Matter?” SM-87-8 David Alan Aschauer “Finite Horizons, Intertemporal Substitution and Fiscal Policy” SM-87-9 Douglas D. Evanoff Diana L. Fortier “Reevaluation of the Structure-ConductPerformance Paradigm in Banking” SM-87-10 David Alan Aschauer “Net Private Investment and Public Expenditure in the United States 1953-1984” SM-88-1 George G. Kaufman “Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options” SM-88-2 David Aschauer “Public Spending and the Return to Capital” SM-88-3 David Aschauer “Is Government Spending Stimulative?” SM-88-4 George G. Kaufman Larry R. Mote “Securities Activities of Commercial Banks: The Current Economic and Legal Environment' SM-88-5 Elijah Brewer, III “A Note on the Relationship Between Bank Holding Company Risks and Nonbank Activity” SM-88-6 G. O. Bierwag George G. Kaufman Cynthia M. Latta “Duration Models: A Taxonomy” G. O. Bierwag George G. Kaufman “Durations of Nondefault-Free Securities” *Limited quantity available. **Out of print. 1 Staff Memoranda (cont'd) SM-88-7 David Aschauer Is Public Expenditure Productive?” SM-88-8 Elijah Brewer, III Thomas H. Mondschean Commercial Bank Capacity to Pay Interest on Demand Deposits: Evidence from Large Weekly Reporting Banks” SM-88-9 Abhijit V. Banerjee Kenneth N. Kuttner Imperfect Information and the Permanent Income Hypothesis” SM-88-10 David Aschauer Does Public Capital Crowd out Private Capital?” SM-88-11 Ellen Rissman Imports, Trade Policy, and Union Wage Dynamics” Staff Studies— series of research studies dealing with various economic policy issues on a national A level. SS-83-1 **SS-83-2 Harvey Rosenblum Diane Siegel “Competition in Financial Services: the Impact of Nonbank Entry,” 1983 Gillian Garcia “Financial Deregulation: Historical Perspective and Impact of the Garn-St Germain Depository Institutions Act of 1982,” 1983 ♦Limited quantity available. **Out of print.
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