Estimating scale economies in financial intermediation: a doubly indirect inference

Abstract

This paper provides a vertically integrated modelling of the financial production process. In a first stage the activity of commercial banks or insurance companies embodies some technical and commercial aspects such as services to depositors or mutualization of risk through distribution of contracts of insurance. In the second stage banks are involved in the intermediation activity. By using a simulation and the doubly indirect inference method for the estimation we were able to resolve two main econometric problems: decomposition of aggregated data over two vertically integrated stages of production and inconsistency of the estimators due to endogeneity and misspecification. An application to French Banking industry is provided.