Abstract
X-efficiency is a non-allocative form of efficiency first introduced by Harvey Leibenstein in 1966. The degree of X-efficiency is measured by the deviation of a firm’s costs of production from the technologically minimum costs of production. X-efficiency theory predicts that firms will produce closer to their cost function when they face pressure to do so. In this paper we review studies of X-efficiency among Chinese banks. These studies include the effect of ownership form, for example, state-owned banks versus privately-owned banks, on costs of production. China’s entrance into the WTO, the effect of a bank issuing an IPO and the effect of bank size are other topics of empirical studies reviewed in this paper. In addition some studies on Hong Kong banks before 1997 are included.
Highlights
IntroductionIn 1966, the year Leibenstein first wrote about X-Efficiency (XE) theory [1]: efficiency implied allocative efficiency, and rationality meant the complete rationality of “economic man”
In 1966, the year Leibenstein first wrote about X-Efficiency (XE) theory [1]: efficiency implied allocative efficiency, and rationality meant the complete rationality of “economic man”.Allocative efficiency means that Price (P) is equal to Marginal Cost (MC), and the marginal products per dollar spent on all inputs are equal with each other (MPl/Pl = MPk/Pk = ··· MPn/Pn)
The results show that Total Factor Productivity (TFP) growth by the State-Owned Commercial Banks (SOCB) and the Joint Stock Commercial Banks (JSCB) has on average been zero but productivity growth of the Construction Bank (CCB) has been 15% a year
Summary
In 1966, the year Leibenstein first wrote about X-Efficiency (XE) theory [1]: efficiency implied allocative efficiency, and rationality meant the complete rationality of “economic man”. Allocative efficiency means that Price (P) is equal to Marginal Cost (MC), and the marginal products per dollar spent on all inputs are equal with each other (MPl/Pl = MPk/Pk = ··· MPn/Pn). If either or both of these did not hold, allocative inefficiency existed. Allocative efficiency theory neglects the possibility of intra-firm inefficiencies that firms are not cost minimizers. This internal inefficiency is what Leibenstein defined as X-Inefficiency (XIE). The results reported here are consistent with the results of studies in the banking industry from all over the world
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