ABSTRACT
This chapter focuses on the x-efficiency model developed by Harvey Leibenstein, where it is argued that, typically, the preferences of economic agents differ. The premise of differential preferences or objective functions among economic agents and effort discretion, elaborated upon by Leibenstein, establishes the basis for a model in which human agency is clearly a determinant of material welfare. The x-efficiency model demonstrates how conscious human action can determine differences in productivity among firms and societies and thereby differences in the level of material well-being. X-inefficiency yields relatively high unit costs and x-efficiency yields relatively low unit costs when there is no strong relationship between wages and working conditions and the level of x-efficiency. Economic profits, according to standard economic theory, should induce more firms to enter into a given industry. The x-inefficient firms are pressured into becoming more x-efficient.
