Analysing scale and scope specialization efficiencies of US agricultural and nonagricultural banks using the Fourier flexible functional form

This study presents results of cost estimation and efficiency analyses of various size categories of agricultural and nonagricultural commercial banks using the Fourier Flexible (FF) function model. The traditional cost estimation model is expanded in this study with the inclusion of loan quality and financial risk indexes often ignored in empirical efficiency models. The FF model produced more intuitive scale efficiency results than the standard translog model owing to its greater global approximation capability. Scale efficiency measures provide evidence of increasing returns to scale for small and medium-size banks. Agricultural banks demonstrated a stronger tendency to maximize the potentials of increasing returns to scale as a result of output expansion. The translog cost model, however, remains a reliable tool in scope efficiency analyses that, in this study, produced results suggesting that agricultural banks are more likely to thrive more efficiently under specialized lending operations.