Harvey Leibenstein, and an anomaly called X-Efficiency

Roger Frantz ()
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Roger Frantz: San Diego State University

Journal of Behavioral Economics for Policy, 2018, vol. 2, issue 1, 25-31

Abstract: Harvey Leibenstein was one of the pre-Kahneman and Tversky behavioral economists who questioned the assumptions of complete rationality, maximizing behavior, and independent decision making. He is most known for X-Efficiency (XE) theory. In the then conventional wisdom the only form of inefficiency was allocative (in)efficiency, in which markets could be inefficient due to market power but firms were always efficient, that is producing on their production and cost frontiers. Leibenstein questioned whether firms were always efficient, and since inefficient firms would constitute an anomaly, Leibenstein called it X – for unknown – efficiency. In this paper the nature and causes of XE are discussed. This is followed by a review of only a few of the over 200 empirical studies on XE. The average level of XE for firms in many industries and in every region of the world is .8. This means that on average firms are producing 20% off their frontiers. This is followed by some implications of the existence of XE.

Keywords: allocative efficiency and X-efficiency; Harvey Leibenstein; anomalies; rationality; procedural and selective; Richard Thaler; financial institutions (search for similar items in EconPapers)
JEL-codes: B21 B31 D01 D21 D22 D61 D91 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:beh:jbepv1:v:2:y:2018:i:1:p:25-31

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