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Retrospectives: X-Efficiency

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  • Michael Perelman

Abstract

In a 1966 article in the American Economic Review , Harvey Leibenstein introduced the concept of "X-efficiency": the gap between ideal allocative efficiency and actually existing efficiency. Leibenstein insisted that absent strong competitive pressure, firms are unlikely to use their resources efficiently, and he suggested that X-efficiency is pervasive. Leibenstein, of course, was attacking a fundamental economic assumption: that firms minimize costs. The X-efficiency article created a firestorm of criticism. At the forefront of Leibenstein's powerful critics was George Stigler, who was very protective of classical price theory. In terms of rhetorical success, Stigler's combination of brilliance and bluster mostly carried the day. While Leibenstein's response to Stigler was well reasoned, it never resonated with many economists, and Leibenstein remains undeservedly underappreciated. Leibenstein's challenge is as relevant today as it ever was.

Suggested Citation

  • Michael Perelman, 2011. "Retrospectives: X-Efficiency," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 211-222, Fall.
  • Handle: RePEc:aea:jecper:v:25:y:2011:i:4:p:211-22
    Note: DOI: 10.1257/jep.25.4.211
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.211
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. “X-Efficiency,” M. Perelman (2011)
      by afinetheorem in A Fine Theorem on 2013-10-17 14:10:16

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    Cited by:

    1. Gosnell, Greer & Metcalfe, Robert & List, John A, 2016. "A new approach to an age-old problem: solving externalities by incenting workers directly," LSE Research Online Documents on Economics 84331, London School of Economics and Political Science, LSE Library.
    2. Bos, Jaap W.B. & Millone, Matteo, 2015. "Practice What You Preach: Microfinance Business Models and Operational Efficiency," World Development, Elsevier, vol. 70(C), pages 28-42.
    3. Arye L. Hillman & Heinrich W. Ursprung, 2016. "Academic exclusion: some experiences," Public Choice, Springer, vol. 167(1), pages 1-20, April.
    4. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals

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