Scale Economies in Indian Commercial Banking Sector: Evidence from DEA and Translog Estimates

Biresh K. Sahoo, Dieter Gstach

Publication: Scientific journalJournal articlepeer-review


Two alternative estimation models, i.e., a translog cost function and data envelopment analysis (DEA) based on a cost model are compared and contrasted in revealing scale economies in the Indian commercial banking sector. The empirical results indicate that while the translog cost model exhibits increasing returns to scale for all the ownership groups, the DEA model reveals economies of scale only for foreign banks, diseconomies of scale for nationalized banks, and both economies and diseconomies of scale for private banks. The divergence of the results obtained from these two estimation models should concern model builders. From an empirical perspective the definition of scale economies through a constant input mix (as in the translog cost model) is very restrictive. The DEA cost model is much more flexible in this respect: It neither requires the restrictive assumptions that the unit factor prices are always available with certainty, nor that these prices are exogenous to the firms. This is so because the cost setup in the DEA cost model assumes that firms not only have control over the mix and quantities of inputs used but also exercise control over input prices. Using several different aspects of production planning process, the DEA cost model imputes a multi-factor perspective in its scale economies estimates to track overall performance. However, the very volatile nature of the banking industry might question the validity of the empirical estimates in this deterministic setting. Therefore, further research is required to examine the bank performance behavior using both SFA and chance constrained DEA for the comparison in a stochastic setting.

Key Words: DEA; Translog cost function; Economies of scale; returns to scale
Original languageEnglish
Pages (from-to)13 - 30
JournalInternational Journal of Information Systems and Social Change
Issue number4
Publication statusPublished - 2011

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