Effort Discretion and Economic Agency and Behavioral Economics: Transforming Economic Theory and Public Policy
RESAISSANCE IN BEHAVIOURAL ECONOMICS HARVEY LEIBENSTEIN'S IMPACT OF CONTEMPORARY ECONOMIC ANALYSIS, Roger Frantz, ed., New York: Routledge, 2007
Posted: 18 Jan 2010
Date Written: 2007
Critical contribution were made by Harvey Leibenstein to the theory of the firm through his development of efficiency wage and X-efficiency theories. Leibenstein focused and nuanced attention to incentives, individual and micro-micro motivations, and competitive pressures in determining individual choice within the firm, and thereby economic outcomes. The basic premises of Leibenstein's X-efficiency and efficiency wage theories and how they contrast with conventional wisdom is examined. These theories are also extended based upon recent research.
Both Leibenstein's X-efficiency and efficiency wage theories yield analytical predictions which differ substantively from conventional wisdom, and suggest alternative firm-level and public policy. Also, unlike contemporary efficiency wage theories, Leibenstein raises the possibility of there being a full employment efficiency wage equilibrium. Leibenstein's focus is upon how firms and agents within the firm actually function and how theory should be revised so that the underlying assumptions of theory best reflect the behavioral assumptions of human agents. This approach is adopted in response to what Leibenstein regards as serious flaws in the contemporary theory of the firm, and his efforts to design theory that yields greater explanatory power and more reasonable public policy. Leibenstein's models provide space for the reality that economic agents can readily and for good reason deviate from what is considered to be rational behavior.
Keywords: Leibenstein, Firm, Efficiency wage, X-efficiency, Incentives, Full employment, Human agents
JEL Classification: J28, D03
Suggested Citation: Suggested Citation