X-inefficiency

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A term from economics referring to a firm's tendency not to maximise output from its installed equipment, systems, or personnel as simple economic theory might suggest.


It is often explained by agency costs as managers pursue their own objectives not the interests of shareholders. But sheer human failing may also be important.

X-inefficiency may also be applied by extension to an industry or to a whole regional or national economy.

An X-efficient firm may, of course, not be allocatively efficient - producing the "right" outputs using the best mix of inputs to produce them.


Reference: Leibenstein, Harvey ("Allocative Efficiency vs. X-Efficiency", American Economic Review 56(3), June 1996, pp 392–415) is normally taken as the source of the term X-efficiency.


See also