Functional forms and declining average costs

The translog form, if fitted to data exhibiting monotonically decreasing av erage costs, generally will imply spurious U-shaped average costs. The reas on is that the log-log transform of any cost function characterized by mono tonically declining average costs is strictly convex in the logarithm of si ze except in limited cases. Simulations suggest that the severity of the bi as is exacerbated by a realistically skewed sample distribution. Similar pr operties of alternative forms also are considered. Estimates fitted to thre e samples of U.S, banks bear out the potential importance of these concerns .