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The so-called &dquo;property tax revolt&dquo; and the New Federalism have combined to increase the state role in financing local schools. This strengthened state role gives rise to a need for reexamining the use of the intergovernmental grants for education in terms of their rationale, design, and effects.

In response to demands for school accountability, states now devote much attention to distinguishing among effective and ineffective schools. These efforts, while varying considerably in rigor and sophistication, generally emphasize technical or allocative efficiency (e.g., the marginal productivity of measured inputs employed in various combinations) in schools and sometimes seek to estimate the "cost" of input bundles associated with successful schools. This approach, however, ignores the impact of "x-efficiency" (e.g., school policies, incentives, practices, etc.) on school performance. Drawing upon Leibenstein's seminal 1966 article on the theory of the firm and the "effective schools" research of the 1980s, this article uses a production function approach and basic econometric techniques to interrogate a rich panel of elementary school-level data in order to quantify the effects of x-efficiency on school performance. Findings reveal a substantial impact of school x-efficiency on academic outcomes, far in excess of the contributions of standard, observed school inputs. School influences are greater for mathematics achievement than for reading achievement in the elementary grades with effect sizes averaging 0.45 standard deviations for reading and 0.61 standard deviations for mathematics.

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