Heterogeneous Credit Union Production Technologies with Endogenous Switching and Correlated Effects

Malikov, Emir and Restrepo-Tobon, Diego A and Kumbhakar, Subal C. (2016): Heterogeneous Credit Union Production Technologies with Endogenous Switching and Correlated Effects.

Abstract

Credit unions differ in the types of financial services they offer to their members. This paper explicitly models this observed heterogeneity using a generalized model of endogenous ordered switching. Our approach captures the endogenous choice that credit unions make when adding new products to their financial services mix. The model that we consider also allows for the dependence between unobserved effects and regressors in both the selection and outcome equations and can accommodate the presence of predetermined covariates in the model. We use this model to estimate returns to scale for U.S. retail credit unions from 1996 to 2011. We document strong evidence of persistent technological heterogeneity among credit unions offering different financial service mixes, which, if ignored, can produce quite misleading results. Employing our model, we find that credit unions of all types exhibit substantial economies of scale.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Unions, Correlated Effects, Ordered Choice, Panel Data, Production, Returns to Scale, Switching Regression
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C34 - Truncated and Censored Models ; Switching Regression Models; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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