economies of scale

With the economy developing, audit firm’s business volume is rising. At the same time, firms merge is increasing, and audit firm’s scale is expanding. Benefiting from scale expansion, audit firms can share audit cost with more customers, reducing the unit audit cost and leading to internal economies of scale. Hong Lin Han, Hanwen Chen (2008) [17] found audit firms classified the potential target customers according to the scales of customers. The audit firms which have multiplied but small size clients adopt a leadership strategy due to economy of scale. Moreover, because of the fierce competition, audit firms may use different resources in different regions according to different investment projects such as in first-tier cities. It may increase the audit cost and infect audit pricing because excellent and talented market needs high cost. Hongqi Yuan, Weifang Han (2012) [18] found market competition had an effect on the audit quality. Furthermore, earning manipulation gets lower and audit quality are higher in fierce competition market. In addition, industry scale expansion is an effective way to improve audit firm’s competition. Therefore, the hypothesis 2 was put forward.

The costs incurred by a REIT depend upon the asset and financing structure of the REIT and the type of management. Costs will vary with differences in geographic location and diversification. For example, because equity REITs own and manage real estate, their costs differ substantially from those of mortgage REITs. Typical expenses associated with an equity REIT include property operating costs, such as property taxes, utilities, insurance, and property management, financing costs, and REIT administration costs. Less frequently incurred costs include those associated with acquisition, disposition and renovation of properties. Mortgage REITs incur limited costs associated with direct operation of real property. Typical costs for a mortgage REIT include asset management fees, generally mortgage servicing and any costs associated with distressed loans, financing costs, and REIT administration costs. Because equity REITs incur different costs than mortgage REITs, equity REITs are expected to experience economies- of-scale differently than mortgage REITs.

that efficiency gains result from local government amalgamations. Their conclusion is that mergers often fail to deliver on the efficiency promises made beforehand, usually because of transitional costs and the labour-intensive nature of most local government services which do not lend themselves to significant economies of scale. Another synthesis of the literature (LUARCC, 2009a) reviewed over 50 studies (most of them drawing on data on US local government) and concluded that there are generally weak but discernable U-shaped relationships between size and costs. Efficiency gains can arise from larger populations for certain services, such as capital or infrastructural services such as water or roads, as well as specialised services such as laboratory services. However, smaller local authorities tended to be more efficient than larger ones in providing labour-intensive services such as police, fire and education services (LUARCC, 2009a). A related research study argued that the experience with local authority amalgamations suggests that cost savings or local tax reductions are not guaranteed and can often fail to materialise, while implementing amalgamations can be expensive and time- consuming. That said, an important side-effect of such proposals is a more thorough exploration of alternative service delivery arrangements which may yield efficiencies, such as shared service arrangements or contracting (LUARCC, 2009b).

The next argument, also much used, is that there are economies of scale. This, often without empirical evi- dence that there are such economies, is asserted to re- quire that mergers of municipalities take place in order to save the taxpayers money. This is the issue to be studied in this paper. In many cases, if such economies existed, they could be achieved by contracting out the function either to private industry or to another government. The “Lakewood Plan” is such intergovernmental contracting where Lakewood CA chose to actually produce almost no services while still providing them (see Ostrom, Tie- bout and Warren [8] for a discussion of this). Why the elected officials would not choose to do such contracting if it were that beneficial is not generally asked. It is sim- ply asserted as a reason that the local officials would lose power and perks.

There is a large literature that considers various strategic aspects of sourcing (see, e.g., Cachon and Harker (2002), Shy and Stenbacka (2003), Chen et al. (2004), Heavner (2004), Chen (2005), Buehler and Haucap (2006), Arya et al. (2008a,b), Chen et al. (2009)). The paper most closely related to ours is Chen (2005), who argues that an integrated firm might have incentive to disintegrate in order to better exploit scale economies. In both papers, scale economies creates reluctance on the part of disintegrated downstream firm to purchase from its integrated rival. However, our paper differs from Chen (2005) in several respects. First, in Chen (2005) the integrated firm is the only one in the upstream market whose technology exhibits scale economies, while all other firms in that market are part of a competitive fringe and produce at constant marginal cost. In contrast, in our paper the technology of the integrated firm as well as the fringe has economies of scale. Scale economies of the fringe in our model drive both downstream firms—disintegrated as well as integrated—to order from the fringe. This is an additional strategic effect of economies of scale which is absent in the model of Chen (2005). Second, these two papers intend to explain different economic phenomena. Chen (2005) focuses on vertical disintegration as a device for integrated firm to win upstream competition, whereas in our paper, the objective is to highlight the strategic role of scale economies in driving the offshore outsourcing trend. In particular, we show that as long as offshore providers specialize on upstream production, the integrated firm will give up its in-house production and join its disintegrated rival in outsourcing offshore. 3

-3- Tables· Table 3.1: The_ Principal Sources and Reviews of Estimates of the Economies of Scale for Manufacturing Industries 32 Table 3.2: The Advantages and Disadvantages of the Method[r]

Table 5 reports the average values of economies of scale and their relative statistical significance in each year between 2000 and 2011 as well as for each size class. The table confirms that economies of scale - rather than diseconomies of scale - are prevalent in European banking showing an average value of around 14% (1 minus 0.8629) - a 100% increase in output quantities increases total cost on average by 86%. Moreover, an analysis of the results for the quintiles discloses that higher economies of scale are realized both for the smallest banks (with total assets between €959 million and €28.326 million), large banks (with total assets between €182.174 and €552.738 billion), and particularly for the biggest banks (with total asset between €552.738 and €258.670 billion). Among listed banks, small and medium-sized banks show lower economies and even diseconomies of scale. This evidence differs from that documented for European banks during the nineties, where diseconomies of scale were typically found for the biggest banks (Altunbas et al., 2001b; Vennet 2002). On the other hand, our findings are similar to recent U.S. studies that typically find evidence of significant economies of scale for the largest banks (Hughes et al. 1996, 2000; Hughes et al. 2001; Feng and Serletis, 2010; Wheelock and Wilson, 2012; Hughes and Mester 2013). Our evidence on the presence of economies of scale, especially for the largest banks, provides little support (from an efficiency standpoint at least) for restricting bank size.

As throughput increases, it is usually possible to use more performing technologies, to improve methods and to adjust layouts, so that economies of scale can be realized. Hence, we assume that g ps is a concave function of the total product flow (X ps ). Similarly, from inventory theory, it can be shown that inventory holding costs are concave functions of total product flow (X ps ) in the node, average product value (V pw /X pw ) and average lead times ( Τ pw /X pw ). As can be seen, when these crucial factors are taken into account, g ps and h pw become complex implicit non-linear and non-separable functions of .

Research suggests a broad distinction between labour-intensive and capital-intensive services (see for example, Houlberg, 2010; CDLR, 2001; Boyne, 1992; or even going back to early studies such as Hirsch, 1959). Dollery and Fleming (2005, p. 9) suggest that more labour-intensive, person-to-person services generate few scale economies “… because their idiosyncratic nature means that an increased volume of services requires a correspondingly larger number of employees”. Examples include housing services, libraries, or planning or environmental inspections – this also extends to services provided by local authorities in many other countries such as schools and policing. More capital-intensive infrastructural services, such as water supply, roads, waste management, can yield more significant economies of scale, given that the higher fixed costs of capital assets can be spread across a wider population and a wider number of households. Within capital-intensive infrastructural services, however, economies of scale are most likely in the production of services, but less likely for distribution costs. For example, the marginal cost of producing water from a single water treatment plant is likely to decline as that plant covers a wider population. However, the distribution costs involved in the supply of water (such as energy expended in pumping systems as well as the maintenance of piping), which depend heavily on land area and population density, tend to increase with a larger population size over a wider geographic area (Fox and Gurley, 2006). Other studies also suggest the potential for economies of scale with regard to administrative overheads, such as human resources, finance and audit, IT supports, legal services, corporate services, as well as costs associated with supporting the political system within local government (see for example: CDLR, 2001; Houlberg, 2010; Fox and Gurley, 2006; Andrews and Boyne, 2009; Swianiewicz, 2010; Blom- Hansen, 2012; or again early studies such as Lomax, 1952).

What are the conditions through which economies of scale (ES) in …nancial intermedi- ation gives rise to equilibrium indeterminacy? When these conditions are satis…ed, what is the quantitative importance of non-fundamental shocks to con…dence in the …nancial sector on economic volatility? These questions are motivated by two distinct literatures: the litera- ture on increasing returns to scale in production where indeterminacy delivers belief-induced business cycles (e.g. Benhabib and Farmer, 1994), and the literature on banking crises where a strategic complementarity in intermediation delivers multiple (steady state) equilibria (e.g. Cooper and Corbae, 2002). In contrast to the literature on indeterminacy from the produc- tion sector, this analysis builds on the empirical evidence of Hughes and Mester (1998) that banks of all sizes exhibit signi…cant economies of scale. 1 In contrast to the literature on

The estimation technique is based on the composed error term (Aigner et al. 1977) which is the core of a stochastic frontier approach. In this paper the focus is on the comparison between the inefficiency levels achieved by different kinds of nursing home and the empirical results show that there’s no difference in efficiency over time and among the ownership types. The paper of Filippini (2001) is the first empirical estimation of a translog cost function on Swiss data. The goal of the paper is the assessment of economies of scale and the data structure utilized is a panel of nursing homes operating in Ticino – a Swiss Canton (State) – over the years 1993-1995. The cost model includes two indicators to partially capture the heterogeneity in the output characteristics and in the quality level. The paper suggests the presence of scale economies at the sample median which correspond to a capacity of 60 beds.

This paper investigates the cost efficiency of 1974 credit institutions across 15 European countries over the five-year period following the implementation of the Second Banking Directive in 1993. The Recursive Thick Frontier Approach is employed to estimate a Augmented Cobb-Douglas cost frontier that allows banks of different types, in different periods, and belonging to different size categories, to operate at different costs per unit of assets. As size economies are exhausted at a balance sheet total of EUR 600 million, we do not find major economic gains from economies of scale for the overall European banking industry. However, the saving bank sector may reduce average costs with roughly 6% by choosing an optimal size for its institutions. No impact of technological progress on the average costs of the full sample of X-efficient banks could be detected but managerial efficient saving banks reduced average costs with 9% during our sample period. The most important reason for inefficiencies in the European banking is managerial inability to control costs. Although in some countries such as the UK and The Netherlands cost reductions were rapidly achieved, the average level of X-inefficiency of European banks still exceeded 16% in 1997.

The United States carpet industry has set a goal to divert 40% of used carpet from landfills by 2012. This significant volume, estimated to be 2.7 billion lb per year, requires the design of an effective logistic network to process the used materials. We investigate the use of facility location heuristics originally developed for the forward distribution of products to this reverse logistics system. The model includes transportation costs and fixed facility and processing costs at the processing plant, the latter exhibiting economies of scale as the facility size increases. The objective is to locate an unknown number of carpet recycling facilities to minimize the total cost. We evaluate the model using data from a known carpet collection network in the continental United States and compare these findings to models that assume a significant increase in collection locations and collection rates to meet specific carpet diversion targets. We show the impact of economies of scale on the solution structure and the impact that collection volumes have on the solution.

In the paper Crivelli, Filippini and Lunati (2002) the authors extend the empirical analysis to a Swiss sample of 886 nursing home for the year 1998 cov- ering almost all the 26 Cantons (States) of the Swiss Confederation. In order to assess the efficiency level of nursing home industry and the impact of ownership and regulation environment on the cost performance a stochastic cost frontier is estimated. The main findings of the paper are: (1) around the 60% of the Swiss nursing homes operate close to the national standard for efficiency, achieving scores of 15% or lower in terms of cost difference to the empirical frontier; (2) there is no statistical evidence of efficiency difference between ownership types and regulatory environment; (3) economies of scale are present and relevant but tend to expire when the capacity reaches 50–60 beds. The work of Farsi, Filip- pini and Künzle (2005) deals with the econometric problem due to unobserved heterogeneity in the stochastic frontier estimation, by applying several methods to the same data set and cost model. The translog cost function is fit to a sample of 36 Swiss nursing homes operating in Ticino over 9 years period (1993–2001). The model includes in the regressors some proxy for quality and patient case-mix (observed heterogeneity) point out that the choice of the econometric approach can influence the empirical results in a substantial way, by considering or not in the efficiency scores the underlying heterogeneity.

7 Table 1‘s solutions mainly focus on improving the institutions surrounding credit union governance to increase the monitoring of agents‘ decisions. The emergence of these institutions is closely associated with the formalization of a financial system. One developing country with many of these institutional features is Ecuador, which is specifically identified in Branch and Baker (1998). These institutional features include a relatively rigorous system of prudential regulation 5 and some capital market formation permitting corporate consolidation and economies of scale. Economies of scale improve monitoring in two ways: 6 (1) they enable credit unions to exploit information technologies to more accurately measure borrower risk, screen loans, and manage accounting information 7 and (2) they make it possible to hire full-time lawyers and collections officers to strengthen contract enforcement, to create stronger loan repayment incentives, and to lengthen members‘ time-horizons (as the risks of insolvency decline).

However, Deaton and Paxson (1998) criticize the economies of scale estimates based on Engel’s method as those without clear theoretical underpinnings. They derive a theoretical model of the economies of scale, based on Barten’s (1964) two-good (private and public) model. Deaton and Paxson (1998) start with the assumption that when household size increases at constant per-capita income, additional resources will be directed towards private goods, such as food. This assumption is derived from the condition that food income elasticity exceeds own price elasticity. Thus, relationship between food expenditures and household size at constant per-capita income should be positive. The theoretical model provides this intuition with the necessary and sufficient condition: price elasticity of the private good must be less than its income elasticity in absolute terms, which should be true for poor households.

Since the early part of this century the telephone industry has been organised as a natural monopoly under the assumption that its cost structure is subadditive. When a firm’s cost function is subadditive (for given input prices) it can produce an arbit- rary output vector more cheaply than any two firms faced with same cost function (Baumol and Braunstein, 1977). Subaddivity can arise from economies of scale and/or economies of scope. However, economies of scale are neither necessary nor sufficient for subadditivity, while economies of scope are necessary. Economies of scale exist when the marginal costs of production are less than ray average cost over the relevant output range. Economies of scope exist when common facilities make the production of a combination of goods less expensive then producing them separately. As single firm production is the more cost effective in producing any output mix, monopolistic firms are usually subject to price and entry regulation in an attempt to achieve competitive outcomes (Berg and Tschirhart, 1995).

The central feature in Krugman’s approach is economies of scale that are internal to the firm, i.e., the firm itself can reduce its own average cost by expanding production. Under such conditions, markets cannot be perfectly competitive. Models of imperfect competition had often been shunned in trade theory because of their analytical complexity. But Krugman made use of a recent model of monopolistic competition due to Dixit and Stiglitz (1977) that turned out to be well suited for the analysis of trade. 3 In that spirit, he assumed that there are n different goods, and that consumers have a taste for variety that can be expressed by the following utility function:

This paper investigates economies of scale (ES) in …nancial intermediation as a source of equilibrium indeterminacy. Consumption in the model can be purchased with currency and deposits, and ES in intermediation implies that deposit costs are decreasing in aggregate deposits. The results suggest that indeterminacy does not depend on a large degree of ES nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of ES, while policies targeting nominal rates eliminates indeterminacy for all degrees of ES.

~ · The relationship between ton-miles and cost per ton-mile will answer the question as to whether there are economies of scale in the truckload segment of the motor carrier in[r]