Recent measurements of local-area and wide-area traffic have shown that network traffic exhibits variability at a wide range of scales. In this paper, we examine a mechanism that gives rise to self-similar network traffic and present some of its performance implications. The mechanism we study is the transfer of files or messages whose size is drawn from a heavy-tailed distribution.First, we show that in a ``realistic'' client/server network environment---i.e, one with bounded resources and coupling among traffic sources competing for resources---the degree to which file sizes are heavy-tailed can directly determine the degree of traffic self-similarity at the link level. We show that this causal relationship is robust with respect to changes in network resources (bottleneck bandwidth and buffer capacity), network topology, the influence of cross-traffic, and the distribution of interarrival times.Second, we show that properties of the transport layer play an important role in preserving and modulating this relationship. In particular, the reliable transmission and flow control mechanisms of TCP (Reno, Tahoe, or Vegas) serve to maintain the long-range dependency structure induced by heavy-tailed file size distributions. In contrast, if a non-flow-controlled and unreliable (UDP-based) transport protocol is used, the resulting traffic shows little self-similarity: although still bursty at short time scales, it has little long-range dependence.Third, we show performance implications of self-similarity as represented by performance measures including packet loss rate, retransmission rate, and queueing delay. Increased self-similarity, as expected, results in degradation of performance. Queueing delay, in particular, exhibits a drastic increase with increasing self-similarity. Throughput-related measures such as packet loss and retransmission rate, however, increase only gradually with increasing traffic self-similarity as long as reliable, flow-controlled transport protocol is used.