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Harvey Leibenstein, and an anomaly called X-Efficiency

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  • Roger Frantz

    () (San Diego State University)

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.

Suggested Citation

  • Roger Frantz, 2018. "Harvey Leibenstein, and an anomaly called X-Efficiency," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 2(1), pages 25-31, March.
  • Handle: RePEc:beh:jbepv1:v:2:y:2018:i:1:p:25-31
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    allocative efficiency and X-efficiency; Harvey Leibenstein; anomalies; rationality; procedural and selective; Richard Thaler; financial institutions;

    JEL classification:

    • 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
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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