How stable is the multiproduct translog cost function? Evidence from the Dutch banking industry

This paper presents evidence on the stability of the multiproduct translog cost function from a sample of Dutch banks. It is concluded that a hybrid form of this function is unable to capture the production structures of banks on edges of the cost surface. It is advisable, therefore, to exclude highly specialized banks and unit-branch banks from the sample. Unlike most other bank cost studies, the average cost curve is found to be L-shaped rather than U-shaped. Significant scope diseconomies between loans and savings accounts suggest that there is no natural monopoly in the Dutch banking sector.