Blackwell Reference Online

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X‐efficiency is a state of production in which, for a given level of input usage, there is no way of increasing the output. The output process is thus also said to be production efficient ( Friedman, 1990: 436 ). In contrast, X‐inefficiency represents the failure to obtain maximum output from a given combination of inputs. Leibenstein (1966) developed the idea of X‐inefficiency as a way of describing the results of a weakened incentive structure for cost‐conscious, efficient management, especially in the absence of competitive market forces. For example, a state‐run monopoly that does not incorporate the goal of profit maximization tends to create an incentive structure among managers in the firm discouraging aggressive cost efficiency. In general, government bureaucracies driven by the goal of maximizing their operating budgets offer the most salient examples of X‐inefficiency (see Niskanen, 1971 ). Such managerial lassitude is based on the assumption that the market environment determines incentives for effort on the part of managers. Application of this concept to private monopolies or to firms enjoying government protection from competition is problematical, however (see Stigler, 1976 ). Critics of the concept of X‐efficiency claim that the existence of a monopoly or beneficial government intervention may not reduce managerial effort itself, but rather may merely redirect ... log in or subscribe to read full text