Editing X-inefficiency (section)

== Overview ==
The difference between the actual and minimum cost of production for a given output produces X-inefficiency.<ref>{{Cite journal |last=Leibenstein |first=H |date=1978 |title=On the basic proposition of x-efficiency theory |journal=American Economic Review |volume=68 |issue=2 |pages=328–332 |jstor=1816715}}</ref>

Companies will incur X-Inefficiency as a result of lack of motivation to control its costs, which brings the [[average cost]] of production exceeds costs actually required for production. For example, the company have a potential potential cost curve. However, due to the lack incentive to motivate on control costs, the company's actual cost curve is at a higher position compared to the potential cost curve.<ref name=":2">{{Cite journal |last1=Leibenstein |first1=Harvey |last2=Maital |first2=Shlomo |date=May 1994 |title=The organizational foundations of X-inefficiency: A game-theoretic interpretation of Argyris' model of organizational learning |journal=Journal of Economic Behavior & Organization |volume=23 |issue=3 |pages=251–268 |doi=10.1016/0167-2681(94)90001-9 |issn=0167-2681}}</ref>

The phenomenon of X-inefficiency is in relation to the allocation of effort, especially the managerial effort.<ref>{{Cite book |last=P. |first=MARTIN, John |title=X-Inefficiency, Managerial Effort and Protection |oclc=1192671818}}</ref>

Mainstream [[economy|economic]] theory tends to assume that the management of firms act to maximize [[Profit (accounting)|profit]] by minimizing the inputs used to produce a given level of output.<ref>{{Cite journal |last1=Yannelis |first1=Nicholas |date=2008 |journal=Economic Theory}}</ref>

Competition energizes firms to seek productive efficiency gains and produce at lowest unit costs or risk losing sales to more efficient rivals. With [[market structure|market forms]] other than [[perfect competition]], such as [[monopoly]], productive inefficiency can persist, because the lack of competition makes it possible to use inefficient production techniques and still stay in business. In addition to monopoly, sociologists have identified a number of ways in which markets may be organizationally embedded, and thus may depart in behavior from economic theory.<ref name=":0">{{Cite web |title=X-inefficiency |website=Policonomics |date=30 November 2012 |url=http://policonomics.com/x-inefficiency/ |access-date=2018-01-11 |language=en-US}}</ref>

Organizational slack occurs when firms opt to employ more resources than are needed to produce a given level of output. Unused capacity results in X-inefficiency. Organizational slack can be explained by the [[Principal–agent problem|principal-agent problem]]. In companies ownership and management are separate. Shareholders (the principal) elect directors (the agent) to act on their behalf and maximize shareholder value. Managers may take decisions that maximize their own and not shareholder objectives e.g. hiring extra staff to reduce manager workloads. This increases unit costs.

X-inefficiency only looks at the outputs that are produced with given inputs. It doesn't take account of whether the inputs are the best ones to be using, or whether the outputs are the best ones to be producing. For example, a firm that employs brain surgeons to dig ditches might still be X-efficient, even though reallocating the brain surgeons to curing the sick would be more efficient for society overall. In this sense, X-inefficiency focuses on [[productive efficiency]] and minimising costs rather than [[allocative efficiency]] and maximising welfare. For more extensive discussions, see Sickles and Zelenyuk (2019, p.&nbsp;1-8, 469) and references therein.<ref>[https://assets.cambridge.org/97811070/36161/frontmatter/9781107036161_frontmatter.pdf  Sickles, R., & Zelenyuk, V. (2019). Measurement of Productivity and Efficiency: Theory and Practice. Cambridge: Cambridge University Press. doi:10.1017/9781139565981 ]</ref>