Cost Function for Savings and Loan Industry

* The empirical estimation of long run cost function can be useful in restructuring of the savings and loan industry in wake of savings and loan collapse in 1980s.

* Data for 86 savings and loans for 1975 & 1976 in six western states

- Q = total assets of each S&L

- LAC = average operating expense

- Q & TC are calculated in hundreds of millions of dollars

- Average operating cost is calculated as a percentage of total assets.

*  A quadratic long run average cost function was estimated for the year 1975:



Minimum long run average cost reaches its point of minimum average the total cost when total assets of savings and loan reach $574 million.

* Average operating expenses are 0.61% of total assets.

* Almost all savings and loans in region being studied had substantially below $574 million in assets.

* Questions

 1)  What are implications of analysis for expansion and mergers?

 2)  What are limitations of using these results?