Glossary – X-Efficiency

The degree of efficiency maintained by companies (or individuals) in market situations characterized by imperfect competition. The concept of x-efficiency states that under those conditions inefficiencies may persist due to the lack of competitive pressure.

If a company is the sole producer and seller of a product, it is at risk of experiencing decreasing x-efficiency. In this case being more or less efficient will not make a significant difference (at least in the short run). If the employees are aware of this and act accordingly, they will not work as hard as in a fully competitive situation since it will not pay off anyways.

The concept of x-efficiency suggests that individuals do not always maximize utility, therefore it somewhat contradicts traditional economic approaches. However it provides valuable insights for employee motivation and incentive design. As a result, by considering this concept it may be possible to significantly increase efficiency levels within an economy.