An Assessment of X-Efficiency Gained Through Competition

Abstract

The X-efficiency concept was developed in a landmark article by Harvey Leibenstein (1966). Essentially, the theory explains that, for a variety of reasons, neither organizations nor people work as efficiently or effectively as they could. Leibenstein points out that competition, in an important way, affects the intensity with which firms and people work; where competitive pressure is light, many people trade the disutility of greater effort, of search, and the control of other peoples' activities for the utility of feeling less pressure and of better interpersonal relations. The theory postulates the tendency for a firm's costs to be lower whenever it faces competition because of variable performance with a given level of inputs. The purpose of this article is to examine the competitive aspect of the X-efficiency theory and to assess its validity. This additional study is justified because in neither the studies cited by Leibenstein nor in subsequent studies was the impact of competition on firm costs evaluated empirically. This deficiency seems to be significant because Leibenstein emphasized the importance of the competitive effects in the theory of X-efficiency.