What is X-Efficiency?
X-efficiency describes a company's inability to get the maximum output for its inputs due to a lack of competitive pressure.
How Does X-Efficiency Work?
Economist Harvey Leibenstein, a Harvard professor who studied the psychological aspects of , first used the . His theory was that when companies aren't very competitive, their workers don't behave as efficiently. For example, let's say that companies A, B, and C together own about 90% of the for widgets. They are large companies that compete fiercely on price and service. Company D is a tiny company that is also trying to sell widgets, but it is not doing so profitably.
Despite the fact that the market for widgets is competitive, Company D isn't much of a competitor and the employees know that. According to the theory, the employees don't work as hard at Company D because of this. They know that being more efficient won't make a difference. That is, their x-efficiency falls.
Similarly, let's assume that Company A is the only manufacturer of widgets in the market. It has a monopoly. This scenario, under the theory, leads to the same situation that Company D was in: Because employees know that nothing foreseeable change the company's market share, they become less productive.
Why Does X-Efficiency Matter?
Leibenstein's concept of x-efficiency conflicts with traditional neoclassical
One side effect of reductions in x-efficiency, one should , is that it is usually predicated on a lack of competitive ability. Accordingly, when a company with lower x-efficiency is less focused on undercutting and taking out competitors, it might deploy more of its in other areas (R&D or higher wages, for example), that could improve its health in the long-term. It is also important to that x-efficiency doesn't evaluate whether a company's inputs are the best inputs for the outputs it is seeking to produce.