Towards a general theory of X-efficiency
Abstract The principal discretionary variable for a person seeking to improve his lot is efficiency. Efficiency is determined jointly by interacting economic and psychological variables, with intertemporal feedbacks. This article explores a dynamic framework that illustrates how the key facets in the economic life of an individual—exertion, output, income, consumption, saving, and utility—constitute an interwoven network. The network is specified, and special attention is given to two of the linkages: effort choice and the intertemporal relationship of utilities. The neo-classical Ramsey model is shown to be a limiting case of the more general behavioral model based on the Matching Law in psychology. X-inefficiency is then defined by the deviation from the Ramsey Path.