X-inefficiency is an underrated idea

Here is Harvey Leibenstein from way back when:

Complete constraint concern is the same as maximization. Selective rationality usually involves less than complete constraint concern. Also, there is a tradeoff between less constraint concern and more internalized pressure that an individual feels as a consequence of less concern. Thus an individual’s personality will determine the combination of degree of constraint concern and pressure he or she would like to choose — one that he feels most comfortable with. In general the individual strikes a compromise between the way he would like to behave (very low constraint concern) and the way he feels he ought to behave, which depends on internalized standards for performance and external pressures. This implies that individuals do not necessarily or usually pursue gains to be obtained from an opportunity to a maximum degree or marshal information to an optimal degree; also, maximizing behavior is a special case in this system.

…Thus personality and context select, so to speak, the degree of rationality that will control an individual’s decision-making (and performing) behavior.

A competitive environment may not eliminate X-inefficiency for at least two reasons. First, “There may be a lack of supply of the right kind of entrepreneurs.”  Second, firms may engage in rent-sheltering activities instead.

Inertia and peer groups also were central ideas in Leibenstein’s theory, and you can see both factors at work today, or sometimes not at work, in our response to various emergencies.  You will note this framework may help explain why the responses of our national, state, and local governments can vary so much in quality, depending on the issue.

Leibenstein was still at Harvard when I studied there, but word was that he himself had “gone X-inefficiency” and decided to stop producing.  Here are Dean and Perlman with an appreciation of Leibenstein.  As for Leibenstein’s key piece on x-inefficiency: “Between 1969 and 1980, the article was the third most frequently cited in the Social Science Citation Index.”  Today it is virtually forgotten.

Welcome to another year of MR!


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