Testing for Complementarity and Substitutability in the Case of Multiple Practices

Abstract

Recent empirical studies of firm-level performance have been concerned with establishing potential complementarity between more than two organizational practices. These papers have drawn conclusions on the basis of potentially biased estimates of pair-wise interaction effects between such practices. In this paper we develop a consistent testing framework based on multiple inequality constraints that derives from the definition of (strict) super modularity as suggested by Athey and Stern (1998). Monte Carlo results show that the multiple restrictions test is superior for performance models with high explanatory power. If practices explain only a minor part of organizational performance no test is able to identify complementarity or substitutability in a satisfactory manner.

Keywords: Complementarity, Constraint, Effects, Empirical study, Firm performance, Framework, Interaction effects, Model, Models, Performance, Power, Studies, Supermodularity

JEL Classification: C12, D24