when calculating x efficiency a data point is usually selected to represent an industry and then it is modeled using regression analysis for example a bank might be judged by total costs divided by total assets to get a single data point for a firm then the data points for all the banks would be compared using regression analysis to identify the most x efficient and where the majority fall this analysis can be done for a specific country to find out how x efficient certain sectors are or across borders for a particular sector to see the regional and jurisdictional variations 
history of x efficiencyleibenstein proposed the concept of x efficiency in a 1966 paper titled allocative efficiency vs x efficiency which appeared in the american economic review allocative efficiency is when a company s marginal costs are equal to price and can occur when the competition is very high in that industry prior to 1966 economists believed that firms were efficient with the exception of circumstances of allocative efficiency leibenstein introduced the human element whereby factors could exist attributable to management or workers that don t maximize production or achieve the lowest possible costs in production in the summary section of the paper leibenstein asserted that microeconomic theory focuses on allocative efficiency to the exclusion of other types of efficiencies that are much more significant in many instances furthermore improvement in non allocative efficiency is an important aspect of the process of growth leibenstein concluded that the theory of the firm does not depend on cost minimization rather unit costs are influenced by x efficiency which in turn depends on the degree of competitive pressure as well as other motivational factors in the extreme market structure case monopoly leibenstein observed less worker effort in other words with no competition there is less worker and management desire to maximize production and compete on the other hand when competitive pressures were high workers exerted more effort leibenstein argued that there is much more to gain for a firm and its profit making ways by increasing x efficiency instead of allocative efficiency the theory of x efficiency was controversial when it was introduced because it conflicted with the assumption of utility maximizing behavior a well accepted axiom in economic theory utility is essentially the benefit or satisfaction from a behavior such as consuming a product x efficiency helps to explain why companies might have little motivation to maximize profits in a market where the company is already profitable and faces little threat from competitors before leibenstein companies were believed to always maximize profits in a rational manner unless there was extreme competition x efficiency posited that there could be varying levels of degrees of efficiency that companies might operate firms with little motivation or no competition could lead to x inefficiency meaning they choose not to maximize profits because there s little motivation to achieve maximum utility however some economists argue that the concept of x efficiency is merely the observance of workers utility maximizing tradeoff between effort and leisure empirical evidence for the theory of x efficiency is mixed x efficiency vs x inefficiencyx efficiency and x inefficiency are the same economic concept x efficiency measures how close to optimal efficiency a firm is operating in a given market for example a firm may be 0 85 x efficient meaning it is operating at 85 of its optimal efficiency this would be considered very high in a market with significant government controls and state owned enterprises x inefficiency is the same measurement but the focus is on the gap between current efficiency and potential a state owned enterprise in the same market as the previous company may have an x efficiency ratio of 0 35 meaning it is operating at only 35 of its optimal efficiency in this case the firm may be referred to as x inefficient to draw attention to the large gap even though it is still x efficiency that is being measured 