Resource Competition, Amplification, and the Evolution of Performance Differences

Phebo Wibbens, INSEAD

Abstract: This paper presents a formal model of how resource competition affects the evolution of profit differences among competitors. The model shows that competition for scarce resources drives amplification over time of small resource differences into large performance differences, thus providing a central mechanism for why firm-specific effects are on average several times larger than industry effects in driving performance heterogeneity. Moreover, the magnitude of the amplification depends on industry-level resource characteristics, thus providing testable pre-dictions about differences across industries in the extent to which variations in returns are driven by firm-specific versus industry effects. Empirical results from a Bayesian hierarchi-cal analysis of the variance decomposition of stock market returns corroborate the model’s predictions.

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Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.