1966_H.Leibenstein_Allocative Efficiency vs. X-Efficiency.pdf

1966_H.Leibenstein_Allocative Efficiency vs. X-Efficiency.pdf

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American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org American Economic Association Allocative Efficiency vs. "X-Efficiency" Author(s): Harvey Leibenstein Source: The American Economic Review, Vol. 56, No. 3 (Jun., 1966), pp. 392-415 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/1823775 Accessed: 29-08-2015 15:23 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] This content downloaded from 195.70.223.102 on Sat, 29 Aug 2015 15:23:03 UTC All use subject to JSTOR Terms and Conditions
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ALLOCATIVE EFFICIENCY VS. "X-EFFICIENCY" By HARVEY LEIBENSTEIN* At the core of economics is the concept of efficiency. Microeconomic theory is concerned with allocative efficiency. Empirical evidence has been accumulating that suggests that the problem of allocative efficien- cy is trivial. Yet it is hard to escape the notion that efficiency in some broad sense is significant. In this paper I want to review the empirical evidence briefly and to consider some of the possible implications of the findings, especially as they relate to the theory of the firm and to the explanation of economic growth. The essence of the argument is that microeconomic theory focuses on allocative efficiency to the exclusion of other types of efficiencies that, in fact, are much more significant in many instances. Furthermore, improvement in "nonallocative efficien- cy" is an important aspect of the process of growth. In Section I the empirical evidence on allocative efficiency is pre- sented. In this section we also consider the reasons why allocation inefficiency is frequently of small magnitude. Most of the evidence on allocative inefficiency deals with either monopoly or international trade. However, monopoly and trade are not the focus of this paper. Our primary concern is with the broader issue of allocative efficiency versus an initially undefined type of efficiency that we shall refer to as "X-efficiency." The magnitude and nature of this type of efficiency is examined in Sections II and III. Although a major element of "X- efficiency" is motivation, it is not the only element, and hence the terms "motivation efficiency" or "incentive efficiency" have not been employed. As he proceeds, the reader is especially invited to keep in mind the sharp contrast in the magnitudes involved between Tables 1 and 2.
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