Skip Nav Destination
Close Modal
Update search
NARROW
Format
Journal
Date
Availability
1-1 of 1
Joseph P. Hughes
Close
Follow your search
Access your saved searches in your account
Would you like to receive an alert when new items match your search?
Sort by
Journal Articles
Publisher: Journals Gateway
The Review of Economics and Statistics (1998) 80 (2): 314–325.
Published: 01 May 1998
Abstract
View article
PDF
We amend the standard cost model to account for the role of financial capital in banking. The cost function is conditioned on the level of capital, but we model the demand for financial capital so that it can serve as a cushion against insolvency for potentially risk-averse managers and as a signal of risk for less informed outsiders. Scale economies are then computed without assuming that the bank chooses a level of capitalization that minimizes cost. We find evidence of substantial scale economies and that bank managers are risk averse and use the level of financial capital to signal the level of risk.