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The Evolution of Cost-Productivity and Efficiency Among U.S. Credit Unions

Advances in information-processing technology have significantly eroded the advantages of small scale and proximity to customers that traditionally enabled community banks and other small-scale lenders to thrive. Nonetheless, U.S. credit unions have experienced increasing membership and market share, though consolidation has reduced the number of credit unions and increased their average size. We investigate the evolution of the efficiency and productivity of U.S. credit unions between 1989 and 2006 using a new methodology that benchmarks the performance of individual firms against an estimated order-α quantile lying “near” the efficient frontier. We construct a cost analog of the widely-used Malmquist productivity index, and decompose the index to estimate changes in cost and scale efficiency, and changes in technology, that explain changes in cost-productivity. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted an unfavorable shift in technology that increased the minimum cost required to produce given amounts of output. In addition, all but the largest credit unions became less scale efficient over time.

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