This paper presents a technique of cost-function estimation, based on the theory of finite mixture distributions, which allows for the simultaneous existence of multiple technologies of production when the researcher does not know which observations correspond to which technologies. The finite mixture technique provides estimates of the proportions of firms using the various technologies, facilitates comparisons between technologies, and preserves the traditional interpretations of cost estimation. After describing the mixture procedure, the technique is illustrated on a large sample of savings and loan associations, and it is concluded that this industry exhibits multiple technologies of production.

This article applies finite mixture distributions to the estimation of cost functions for financial firms through time. The mixture approach allows the estimation of multiple technologies when firms' technology choices are unobservable. Technology switching (‘diffusion’) and underlying technical change are simultaneously evaluated. An application to large samples of U.S. banks for the years 1982–1986 illustrates the approach. Results suggest banks switch to lower cost production technologies when unburdened by strict branching regulations.