CandleFocus Glossary Editor
X-Efficiency is a concept of economic efficiency developed by economist Harvey Leibenstein in the 1950s. X-Efficiency occurs when firms do not succeed in taking full advantage of the opportunities for rational economic activity existing in a market. The concept challenges the beliefs that firms are always rational and that competition results in an optimal level of efficiency.
X-efficiency is defined as the efficiency which is observed in firms when there is an absence of perfect competition. This could be due to a single position of dominance in a market or due to any other form of imperfect competition such as imperfect information due to a lack of information, technology, resources or the presence of motivated actors. X-efficiency is often the opposite of the traditional mainstay of economic efficiency which presupposes that when firms are in competition, they will always make decisions that yield the greatest monetary benefit.
Part of what differentiates it from traditional notions of efficiency is its focus on other, non-monetary benefits which might be available to a firm. X-efficiency recognizes that firms can and often do make decisions motivated by factors other than profits. Individual actors, such as managers and employees, may have goals or interests which influence their decision-making. This could be in the form of goals such as increased work satisfaction, increased authority or power within the firm, or simply a feeling of loyalty to the company. By recognizing that non-monetary benefits matter, x-efficiency provides a framework for understanding how firms may fare when operating under imperfect or distorted conditions.
An example of x-efficiency can be found in the case of a monopoly. Generally, a monopoly will have less competition and is thus prone to inefficiencies due to factors like lack of competition and information asymmetry. A monopolist might be able to charge more than what is necessary due to its unique position in the market. This could lead to a situation where a firm is not making decisions that are in its own best interest. X-efficiency recognizes this phenomenon and thus provides an avenue to understand how thriving firms manage these situations.
On a broader level, x-efficiency is also a reminder that a firm’s decisions often depend on actors, goals and perspectives other than those associated with pure profit-driven models of decision-making. This recognition can lead to improved strategies, competitive advantages, and an overall increase in a firm’s success in markets where economic rationalism does not always apply.
X-efficiency is defined as the efficiency which is observed in firms when there is an absence of perfect competition. This could be due to a single position of dominance in a market or due to any other form of imperfect competition such as imperfect information due to a lack of information, technology, resources or the presence of motivated actors. X-efficiency is often the opposite of the traditional mainstay of economic efficiency which presupposes that when firms are in competition, they will always make decisions that yield the greatest monetary benefit.
Part of what differentiates it from traditional notions of efficiency is its focus on other, non-monetary benefits which might be available to a firm. X-efficiency recognizes that firms can and often do make decisions motivated by factors other than profits. Individual actors, such as managers and employees, may have goals or interests which influence their decision-making. This could be in the form of goals such as increased work satisfaction, increased authority or power within the firm, or simply a feeling of loyalty to the company. By recognizing that non-monetary benefits matter, x-efficiency provides a framework for understanding how firms may fare when operating under imperfect or distorted conditions.
An example of x-efficiency can be found in the case of a monopoly. Generally, a monopoly will have less competition and is thus prone to inefficiencies due to factors like lack of competition and information asymmetry. A monopolist might be able to charge more than what is necessary due to its unique position in the market. This could lead to a situation where a firm is not making decisions that are in its own best interest. X-efficiency recognizes this phenomenon and thus provides an avenue to understand how thriving firms manage these situations.
On a broader level, x-efficiency is also a reminder that a firm’s decisions often depend on actors, goals and perspectives other than those associated with pure profit-driven models of decision-making. This recognition can lead to improved strategies, competitive advantages, and an overall increase in a firm’s success in markets where economic rationalism does not always apply.