X-Efficiency

X-inefficiency is the difference between efficient behavior of businesses assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure. The concepts of x-inefficiency were introduced by Harvey Leibenstein.

Definition of 'X-Efficiency'

The degree of efficiency maintained by individuals and firms under conditions of imperfect competition. According to the neoclassical theory of economics, under perfect competition individuals and firms must maximize efficiency in order to succeed and make a profit; those who do not will fail and be forced to exit the market. However, x-efficiency theory asserts that under conditions of less-than-perfect competition, inefficiency may persist.

Economists explains 'X-Efficiency'

The concept of x-efficiency was proposed by economist Harvey Leibenstein in a 1966 paper. The theory of x-efficiency is controversial because it conflicts with the assumption of utility-maximizing behavior, a well-accepted axiom in economic theory. Instead, some economists argue that the concept of x-efficiency is merely the observance of workers' utility-maximizing tradeoff between effort and leisure. Empirical evidence for the theory of x-efficiency is mixed.