Keywords: Productivity, scope economies, scale economies, financial institutions
Abstract: In the past decade, the U.S. economy has witnessed a tremendous surge
in the usage of electronic payment processing services and an
increased importance of the firms that provide these services. The
payments industry has also undergone changes in cost structure with
the introduction of new technology. Unfortunately, data on the
private provision of payment processing services are not available.
However, the Federal Reserve provides similar services and collects
data on its own provision of payments processing, offering an
opportunity to gain insights into the cost structure of payments
processing. In this paper, we estimate the scope and scale economies
and the technical change in the Federal Reserve's provision of
payments processing from 1990-2000. We find considerable scale
economies and evidence of some scope economies for the provision of
automated clearinghouse, Fedwire, and book-entry services no matter
whether we specify a separable quadratic or a translog cost function.
In addition, we find that disembodied technical change also
contributed to the overall reduction in costs throughout the 1990s.
Full paper (218 KB PDF)
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Last update: December 30, 2002