The Role of Competitive Amplification in Explaining Sustained Performance Heterogeneity

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.

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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.