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X-Efficiency

What is 'X-Efficiency'

X-efficiency is 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.

Explaining '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.


Further Reading


X-efficiency in Australian banking: An empirical investigation
www.sciencedirect.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

Cost X-efficiency in China's banking sectorCost X-efficiency in China's banking sector
www.sciencedirect.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

The X-efficiency in Islamic banksThe X-efficiency in Islamic banks
papers.ssrn.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

Is there a liability of foreignness in global banking? An empirical test of banks' X‐efficiencyIs there a liability of foreignness in global banking? An empirical test of banks' X‐efficiency
onlinelibrary.wiley.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

X‐efficiency and productivity change in Australian bankingX‐efficiency and productivity change in Australian banking
onlinelibrary.wiley.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

Bank mergers, X‐efficiency, and the market for corporate controlBank mergers, X‐efficiency, and the market for corporate control
www.emerald.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

The Empirical Analysis on the X-Efficiency of Chinese Commercial Banks <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200703009.htm' />The Empirical Analysis on the X-Efficiency of Chinese Commercial Banks [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-JJYJ200703009.htm'>PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …

Estimates of X-Efficiency for the US Life Insurance IndustryEstimates of X-Efficiency for the US Life Insurance Industry
books.google.com [PDF]
… cross-country comparisons are difficult to interpret because the regulatory and economic environments faced by financial institutions are likely … This study used DEA to measure x-efficiency in Australian banks in the year of 1996 … Review of Economics and Statistics, 72 (1990), pp …



Q&A About X-Efficiency


Do you agree with Leibenstein's theory ?

I agree with Leibenstein's theory because I believe

How does competition energize firms to seek productive efficiency gains?

Competition energizes firms to seek productive efficiency gains by minimizing inputs used to produce a given level of output.

When might you expect X-inefficiencies to exist in an economy?

You would expect X-inefficiencies to exist when there are monopolies or oligopolies present in an economy because these types of market structures allow for less competitive pressures which allows for inefficient behaviors like overproduction, underproduction, price discrimination, etc...

What does neoclassical theory assert about perfect competition?

It asserts that those who do not maximize their efficiency will fail and be forced to exit the market.

How do individuals and firms maintain efficiency under conditions of imperfect competition?

They must maximize their efficiency in order to succeed and make a profit. Those who do not will fail and be forced to exit the market.

Does empirical evidence support Leibenstein's theory of x-efficieny ?

Yes, some studies suggest that workers are willing to trade off leisure time for higher wages, which suggests they are making an effort based on utility maximization rather than simply maximizing profits as many economic models assume .

What is x-efficiency?

X-efficiency is the degree of efficiency maintained by individuals and firms under conditions of imperfect competition.

Can you think of any examples where this might occur ?

Yes, one example might be a worker whose job requires them to work overtime hours but they are paid more for doing so .

What does productive efficiency gains mean?

It means that firms will produce at lowest unit costs or risk losing sales to more efficient rivals.

What are some market forms other than perfect competition?

Monopoly and oligopoly.

Why can't X-inefficiency persist with monopoly and oligopoly?

Because monopolies and oligopolies don't face any threat from new entrants into their markets so they don't have any incentive to be as efficient as possible like perfectly competitive firms do.

Is it possible for inefficiency to persist under perfect competition?

No, because if it did then those who were inefficient would have already failed or exited the market.

How do firms seek productive efficiency gains?

Firms seek productive efficiency gains through competition.

Why can't X-inefficiency persist with perfect competition?

Because perfect competition forces all firms to be as efficient as possible.

What is X-inefficiency?

X-inefficiency is the divergence of a firm's observed behavior in practice, influenced by a lack of competitive pressure, from efficient behavior assumed or implied by economic theory.

Why was Harvey Leibenstein so interested in studying x-efficiency?

He was interested in studying x-efficiency because he believed that less than perfect competition could exist even though economists had long assumed otherwise. He also believed that this could explain why some businesses were successful while others failed despite having similar resources at their disposal. This led him to believe that there may be other factors involved besides just maximizing profits, which ultimately led him to develop his theory on x-efficiency.

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