Many empirical studies found a positive correlation between high performance work system (HPWS) and firm performance. This evidence is often used to advocate and promote HPWS. We caution such policy recommendations. Our theoretical model suggests that HPWS and profit are often simultaneously determined by common contextual variables, such as firm-specific production technology and product and input market conditions. Our model implies: 1) A positive HPWS-performance relationship is predicted when firms optimize inputs. 2) A firm deviating from its own optimal input allocation and adopting HPWS may see worsened financial performance. 3) Individual firms' financial performance shifts with HPWS adoption vary depending on initial positioning. Implications 1 and 3 suggest that empirical studies controlling for unobserved firm heterogeneity should yield more ambiguous results on the HPWS-financial-performance correlation sign than those not controlling for it. Our policy conclusion is that the positive HPWS-performance correlation has no direct policy implication.
