THE ORGANIZATIONAL FOUNDATIONS OF X-INEFFICIENCY - A GAME-THEORETIC INTERPRETATION OF ARGYRIS MODEL OF ORGANIZATIONAL LEARNING

This paper addresses the issue: Why does X-inefficiency persist in man y organizations, when its existence, nature and causes are known and w hen everyone stands to gain from correcting the errors that cause it? And why are some organizations able to 'learn' while others appear not to? We construct a model of persisting X-inefficiency based on Argyri s' concepts of organizational learning. It is argued that organization s succeed in eliminating X-inefficiency by achieving a critical mass o f individuals willing to admit and correct error. Once achieved, this critical mass may lead to a new, stable and efficient equilibrium.