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 many organizations, when its existence, nature and causes are known and when 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 Argyris' concepts of organizational learning. It is argued that organizations succeed in eliminating X-inefficiency by achieving a critical mass of individuals willing to admit and correct error. Once achieved, this critical mass may lead to a new, stable and efficient equilibrium.