X-Efficiency – Definition

Cite this article as:"X-Efficiency – Definition," in The Business Professor, updated August 2, 2019, last accessed August 4, 2020, https://thebusinessprofessor.com/lesson/x-efficiency-definition/.

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X-Efficiency Definition

X-Efficiency refers to the behavior, performance and efficiency that traders and firms maintain in imperfect competition. In a perfect market competition, elements of monopoly do not exist in the market and the prices of commodities are not controlled by individuals. Under perfect competition, firms and individuals are able to exhibit efficiency to the full potential which in turn cause them to make profits.

In imperfect competition, the market structure tilts towards monopolistic competition and exhibit some features of competitive markets. The x-efficiency theory evaluates how inefficiency of individuals and firms is linked to imperfect competition.

A Little More on What is X-Efficiency

In 1966, Harvey Leibenstein introduced the x-efficiency theory. This theory focuses on how efficiency are maintained by individuals and firms under imperfect competition. In his paper published in 1966 titled; “Allocative Efficiency vs. ‘X-Efficiency,” Harvey Leibenstein extensively discussed allocative efficiency and non-allocative efficiency in the market. The degree of competition and the effects of competitive pressure on  individuals and firms determine how efficient or inefficient they would be. According to Leibenstein, unit costs are significantly influenced by x-efficiency.

Although, the x-efficiency theory evaluates the level at which efficiency is mniatian by individuals and firms under imperfect competition, there are certain drawbacks of the concept. The x-efficiency theory is regarded as a controversial theory because it antagonizes a popular economic theory; utility-maximizing behavior. Hence, there is a conflict between the acceptance of the acceptance of the x-efficiency theory over the utility-maximizing theory.

X-efficiency is a concept that is applicable in diverse fields or disciplines such as bureaucracy, property rights, entrepreneurship, economic development and others.

References for “X-Efficiency

Academic Resarch

Allocative efficiency vs.” X-efficiency”, Leibenstein, H. (1966). Allocative efficiency vs.” X-efficiency”. The American Economic Review, 392-415.

The Xistence of X-efficiency, Stigler, G. J. (1976). The Xistence of X-efficiency. The American Economic Review, 66(1), 213-216.

X-efficiency in Australian banking: An empirical investigation, Sathye, M. (2001). X-efficiency in Australian banking: An empirical investigation. Journal of Banking & Finance, 25(3), 613-630.

Property rights, transaction costs, and X-efficiency: an essay in economic theory, De Alessi, L. (1983). Property rights, transaction costs, and X-efficiency: an essay in economic theory. The American economic review, 73(1), 64-81.

Do mergers improve the X-efficiency and scale efficiency of US banks? Evidence from the 1980s, Peristiani, S. (1997). Do mergers improve the X-efficiency and scale efficiency of US banks? Evidence from the 1980s. Journal of Money, Credit, and Banking, 326-337.

Allocative Efficiency vs.” X-Efficiency”: Comment, Shelton, J. P. (1967). Allocative Efficiency vs.” X-Efficiency”: Comment. The American Economic Review, 57(5), 1252-1258.

Cost X-efficiency in China’s banking sector, Xiaoqing Maggie, F. U., & Heffernan, S. (2007). Cost X-efficiency in China’s banking sector. China Economic Review, 18(1), 35-53.

On the basic proposition of X-efficiency theory, Leibenstein, H. (1978). On the basic proposition of X-efficiency theory. The American Economic Review, 328-332.

X-efficiency in the US life insurance industry, Gardner, L. A., & Grace, M. F. (1993). X-efficiency in the US life insurance industry. Journal of Banking & Finance, 17(2-3), 497-510.

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