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.