Is Bigger Better? A Re-examination of the Scale Economies of REITs

Executive Summary. This study re-examines economies of scale for the equity real estate investment trust (REIT) industry, particularly the use of the translog model in empirical tests. Three cost functional forms are tested using data from 120 equity REITs in 1997: translog, simple quadratic and quadratic semi-log. The commonly utilized translog model is found to have little significance in explaining the scale effect, which suggests that the economy-of-scale parameter results derived from a translog model are irrelevant. However, the simple quadratic and quadratic semi-log functions are found to be significantly concave, supporting the existence of economies of scale in equity REITs.