The Xistence of X-Efficiency

TLDR

Leibenstein identified X‑efficiency as a major source of economic inefficiency, noting that failure to reach the production frontier causes larger social losses than misallocations from monopoly or tariffs, and distinguishing between deficits in knowledge and motivation. The paper argues that X‑efficiency should be incorporated into the conventional theory of allocative inefficiency.

Abstract

Harvey Leibenstein called attention in an influential article (1966) to a source of economic inefficiency which was given the awful name of X[in]efficiency. He cited studies in which misallocations of resources due to monopoly or tariffs had trifling social costs, whereas simple failure to attain the production frontier apparently led to social losses of a vastly greater magnitude. I propose to argue that this type of inefficiency can usefully be assimilated into the traditional theory of allocative inefficiency. It is a question (to be discussed below) whether one ascribes failures to reach the ultimate limits of output from given inputs in any state of technology to inadequacy of knowledge alone, or adds also inadequate motivation. Leibenstein (1966) separates the two: