Phebo Wibbens, INSEAD
Abstract: This paper presents a formal model that elucidates how sustained performance heterogeneity emerges from competitive amplification due to endogenous resource investment under uncertainty. Specifically, the model shows that if resources are scale free, any small resource differences are amplified into large performance differences, leading to high firm-specific heterogeneity in an industry, and vice versa for resources with low scalability. This finding provides a theoretical explanation for the empirical observation that firm-specific components of performance heterogeneity in the variance decomposition studies are significantly larger in some sectors than in others. Consistent with the predictions of the model, the empirical analysis in this paper confirms that industries with more scale free resources on average exhibit higher firm-specific heterogeneity.