X-Efficiency

Harvey Leibenstein was the first to introduce the revolutionary concept of X-efficiency and its counterpart X-inefficiency. X-inefficiency exists when firms and economies do not work as hard or as well as they could. X-inefficiency is caused by an organisational structure which does not promote cooperation among its members. Therefore the organisational structure and work culture of a firm is part of the capital which needs to be invested for a firm to realise its productive potential. X-inefficiency is an important feature in the typical economy as a consequence of imperfect product markets which afford firms protection. In a highly competitive market firms will be more X-efficient but even then X-inefficiency can exist if the less productive firms persist in providing employees with low wages and working conditions to keep unit costs down. X-efficiency theory has triggered much research addressing a variety of theoretical and empirical questions which have profound implications for public policy