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INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly from the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter face, while others may be from any type of computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely afiect reproduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletioiL Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. UMI University Microfilms International A Bell & Howell Information Company 300 North Zeeb Road. Ann Arbor, Ml 48106-1346 USA 313/761-4700 800/521-0600 Order Number 9412036 A study of the banking production efficiency of the primary agricultural cooperatives in Korea: A cost function approach Park, Seong Jae, Ph.D. The Ohio State University, 1993 UMI 300 N. Zeeb Rd. Ann Arbor, MI 48106 A STUDY OF THE BANKING PRODUCTION EFFICIENCY OF THE PRIMARY AGRICULTURAL COOPERATIVES IN KOREA: A COST FUNCTION APPROACH DISSERTATION Presented in Partial Fulfillment of the Requirement for the Degree Doctor of Philosophy in the Graduate School of the Ohio State University By Seong Jae Park, B.A., M.A. ***** The Ohio State University 1993 Dissertation Committee: Approved by Richard L. Meyer, Ph.D. Adviser D. Lynn Foster, Ph.D. Department of Agricultural Economics and Rural Sociology Gary D. Schnitkey, Ph.D. To My Family ACKNOWLEDGMENTS I am indebted to quite a number of persons for the completion of this study. I express my sincere appreciation to Dr. Richard L. Meyer, my principal advisor, for his guidance, support, and encouragement for this study as well as for my entire life in the Ohio State University. Thanks also go to the other members of my committee, Drs. D. Linn Foster and Gary D. Schnitkey, for their comments and suggestions that gave me insights into this research. I extend my gratitude to the staffs of the primary agricultural cooperatives in Choongnam and Kyounggi provinces, of the National Agricultural Cooperatives Federation (NACF), and of the Korea Rural Economics Institute (KREI), for providing the data. Without their cooperation, this study would not have been conducted. I acknowledge with appreciation the financial aid received from the Agency for International Development during my study in the Ohio State University. I wish to express my gratitude for the encouragement and support of friends, fellow students, and faculty in the Department of Agricultural Economics and Rural Sociology. I would like to thank, for proof reading and comments, Renee Drury and Diane Hite. Thanks also go to Chang Kyu Seung, Jae Min Park, Sang Wook Kim, and Dr. Seung II Na, for editing. I especially thank Dr. Dong Kyoon Kim for his great help, guidance, and computer assistance through the years in Columbus, Ohio. All the errors in this document. 111 however, are entirely mine and none of the above named persons are responsible for the errors. Appreciation is extended to Mrs. Barbara Lee for her kindness and encouragement, and to Dr. Cameron Thraen for econometric guidance. I wish to express my sincere thanks to Dr. Chong Hyuk Suh and to Dr. Yang Boo Choi who encouraged me to study in this university and suggested the idea for this study. In completion of this dissertation, special thanks go to my brothers, sisters, and parents-in law for their encouragement and love during my stay in the U.S.. I deeply apologize to my family for my selfishness and express sincere appreciation and love to my wife, Seon Ok, and children. You Kyoung, So Jeong, and Jin Soo, for their patience, sacrifice, and love during the years in Columbus. IV VITA August 25, 1953 ...........................................................Bom in Cheonnam, Korea 1975 - 1977 ................................................................. Military Service, Korea 1980................................................................................ B A , Agricultural Economics, Seoul National University 1982................................................................................ M A , Agricultural Economics, Seoul National University 1982 - 1988 ................................................................. Researcher, Korea Rural Economics Institute (KREI) 1988 - 1989................................................................. Research Fellow (KREI) 1989 - 1993 ................................................................. Research Associate, Department of Agricultural Economics and Rural Sociology, The Ohio State University FIELD OF STUDY Major Fields: Agricultural Economics and Rural Sociology Rural Finance and Production Economics TABLE OF CONTENTS DEDICATION..................................................................................................................... ii ACKNOWLEDGMENTS........................................................................................... ni VITA .................................................................................................................................... V LIST OF TABLES............................................................................................................ ix LIST OF FIGURES....................................................................................................... xi CHAPTER PAGE I. INTRODUCTION............................................................................................... 1 1.1 The Research Problem...................................................................... 4 1.2 The Objectives of Study ................................................................... 7 1.3 The Hierarchy of Administrative Districts in Korea ........................ 8 II A REVIEW OF BANKING PRODUCTION EFFICIENCY STUDIES: THE COST FUNCTION APPROACH.......................................................... 11 2.1 Some Advantages of the Cost Function Approach .................... 13 2 .2 Studies of Banking Output Efficiency ........................................... 15 2.3 Functional Forms ............................................................................ 21 2.4 Production Frontier Approaches to Banking Production 23 2.5 The Objectives of Cooperatives ................................................... 28 2.6 Summary .......................................................................................... 30 VI III KOREAN FINANCIAL MARKETS AND AGRICULTURAL COOPERATIVES............................................................ 32 3 .1 Economic Growth and Financial Development of Korea ............. 33 3.2 Formal Financial Market Structure and Banking by P A C ......... 46 3 .3 Agricultural Cooperatives and Banking Operation ......................... 63 3.4 Summary.......................................................................................... 75 IV DATA AND DESCRIPTIVE ANALYSIS OF BANKING COST STRUCTURE..................................................................... 77 4.1 Data and Sampling ............................................................................ 78 4.2 Operating Characteristics of Sampled PACs ................................. 83 4.3 Descriptive Analysis of Banking Cost Structure ..............................95 4.4 Summaiy........................................................................................... 106 V METHODS AND MODEL SPECIFICATION........................................... 108 5.1 Production Process and Cost Function ......................................... 109 5.2 Frontier Cost Function and Estimation Method .............................114 5.3 Multiproduct Cost Concepts and Output Efficiency Measures ..119 5.4 Model Specification for the Frontier Cost Function ........................136 5.5 Estimation Method of the Frontier Cost Function .........................148 5.6 Variable Selection for the Analysis of Input Inefficiency Sources .................................................................151 VI EMPIRICAL RESULTS.................................................................................... 155 6.1 The Mean Value of the Variables and Product Mix by Deposit Size Class .................................................................... 156 6.2 Model Specification T ests.............................................................. 160 v ii 6.3 Estimation Results of the Frontier Cost Function ...................... 162 6.4 Tests for the Characteristics of Production Technology 166 6.5 Output Inefficiency ......................................................................... 168 6.6 Input Efficiency ............................................................................... 178 6.7 Summary ........................................................................................