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What Is X-Efficiency?

X-efficiency alludes to the degree of efficiency kept up with by firms under conditions of imperfect competition. Efficiency in this context means a company getting the maximum results from its bits of feedbacks, including employee productivity and manufacturing efficiency. In a highly competitive market, firms are forced to be essentially as efficient as conceivable to guarantee strong profits and proceeded with existence. This isn't true in circumstances of imperfect competition, for example, with a monopoly or duopoly.

Figuring out X-Efficiency

X-efficiency points to irrational activities in the market by firms. Traditional neoclassical economics made the assumption that companies operated in rational ways, meaning they maximized production at the least potential costs-even when the markets were not efficient. Harvey Leibenstein, a Harvard teacher and economist, tested the conviction that firms were consistently rational and called this anomaly "X" for obscure or x-efficiency. Without real competition, companies are more lenient toward failures in their operations. The concept of x-efficiency is utilized to estimate the amount more efficient a company would be in a more competitive environment.

Brought into the world in the Ukraine, Harvey Leibenstein (1922-1994) was a teacher at Harvard University whose primary commitment โ€” other than x-efficiency and its different applications to economic development, property rights, entrepreneurs, and organization โ€” was the critical least exertion theory that meant to find a solution to breaking the poverty cycle in immature countries.

While working out x-efficiency, a data point is normally chosen to address an industry and afterward it is demonstrated utilizing regression-analysis. For example, a bank may be decided by total costs separated by total assets to get a single data point for a firm. Then, the data points for every one of the banks would be compared utilizing regression analysis to recognize the most x-efficient and where the majority fall. This analysis should be possible for a specific country to figure out how x-efficient certain sectors are or across borders so that a specific sector might see the regional and jurisdictional varieties.

History of X-Efficiency

Leibenstein proposed the concept of x-efficiency in a 1966 paper named "Allocative Efficiency versus 'X-Efficiency,'" which appeared in The American Economic Review. Allocative efficiency is the point at which a company's marginal costs are equivalent to price and can happen when the competition is exceptionally high in that industry. Prior to 1966, economists accepted that firms were efficient with the exception of conditions of allocative efficiency. Leibenstein presented the human element by which factors could exist, owing to management or workers, that don't maximize production or accomplish the most reduced potential costs in production.

In the summary section of the paper, that's what leibenstein attested "microeconomic theory centers around allocative efficiency to the exclusion of different types of efficiencies that are substantially more critical in many examples. Moreover, improvement in 'non-allocative efficiency' is an important part of the course of growth." Leibenstein presumed that the theory of the firm doesn't rely upon cost-minimization; rather, unit costs are affected by x-efficiency, which thus, "relies upon the degree of competitive pressure, as well as other motivational factors."

In the extreme market structure case-monopoly โ€” Leibenstein noticed less worker exertion. As such, with no competition, there is less worker and management want to maximize production and contend. Then again, when competitive pressures were high, workers exerted more exertion. Leibenstein contended that there is something else to gain for a firm and its benefit making ways by expanding x-efficiency rather than allocative efficiency.

The theory of x-efficiency was disputable when it was presented on the grounds that it clashed with the assumption of utility-maximizing behavior, a very much acknowledged axiom in economic theory. Utility is basically the benefit or satisfaction from a behavior, like consuming a product.

X-efficiency assists with explaining why companies could have little motivation to maximize profits in a market where the company is as of now productive and faces little threat from contenders.

Before Leibenstein, companies were accepted to continuously maximize profits in a rational way, except if there was extreme competition. X-efficiency set that there could be differing levels of degrees of efficiency that companies could operate. Firms with little motivation or no competition could lead to X-inefficiency โ€” meaning they decide not to maximize profits since there's little motivation to accomplish maximum utility. In any case, a few economists contend that the concept of x-efficiency is simply the recognition of workers' utility-maximizing tradeoff among exertion and recreation. Empirical evidence for the theory of x-efficiency is mixed.

X-Efficiency versus X-Inefficiency

X-efficiency and x-inefficiency are a similar economic concept. X-efficiency measures how close to optimal efficiency a firm is operating in a given market. For example, a firm might be 0.85 x-efficient, meaning it is operating at 85% of its optimal efficiency. This would be viewed as exceptionally high in a market with huge government controls and state-owned enterprises. X-inefficiency is a similar measurement, however the emphasis is on the gap between current efficiency and potential. A state-owned enterprise in a similar market as the previous company might have a x-efficiency ratio of 0.35, meaning it is operating at just 35% of its optimal efficiency. In this case, the firm might be alluded to as x-inefficient to draw consideration regarding the large gap, even however still x-efficiency is being estimated.


  • Leibenstein presented the human element, contending that there could be degrees of efficiency, actually intending that-now and again firms didn't necessarily maximize profits
  • Economist Harvey Leibenstein tested the conviction that firms were dependably rational and called this anomaly "X" for obscure or x-efficiency.
  • X-efficiency is the degree of efficiency kept up with by firms under conditions of imperfect competition like the case of a monopoly.