Towards a Theory of Adaptation: X-Efficiency and Adaptive Efficiency

We model how individuals and firms adapt beliefs, heuristics, mental frameworks and norms to changed circumstances. Adaptation competes with other work for limited mental resources. We apply our model to firms experiencing a technology shock. It is optimal for some firms to disband rather than adapt. Greater product homogeneity and greater divergences between traditional norms and new realities increase firms’ propensities to disband. Firms can lower adaptation costs by increasing adaptive capacity. Adaptive capacity is the ability to manage the emotional and mental challenges of confronting change, but building such capacity also competes for limited mental resources.