Economies of Scale and Division of Labor in Commercial Banking

While the classic statement by Adam Smith regarding the division of labor as a source of scale economies was made almost 200 years ago,' there have been few attempts to test this hypothesis empirically. That is, most studies of scale economies either stop after estimating the relevant parameters of the production function or concentrate on the indivisibility of capital equipment as an explanation of scale economies. To test Smith's hypothesis, one would have to have an industry in which economies of scale are present and the output of the firm is exogenously determined by the local market. That is, Smith's original limitation of the ability to subdivide tasks was the "extent of the market," and we can assume that this is given, or exogenous, to the firm in his analysis. In this article, we will show that commercial banking, a labor intensive service industry, is a case in which economies of scale are present, output is determined by the extent of the local market, and division of labor occurs. First, we will describe the results of tests for economies of