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Firm Heterogeneity, Market Power, and Macroeconomic Fragility

Author

Listed:
  • Alessandro Ferrari
  • Francisco Queirós

Abstract

We study how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long slumps. We propose a theory in which the positive interaction between firm entry, competition and factor supply can give rise to multiple steady states. When firms are highly heterogeneous, even small temporary shocks can trigger firm exit and make the economy spiral into a competition-driven poverty trap. We calibrate our model to incorporate the trends on rising firm heterogeneity, and show that they significantly increase the likelihood and length of slow recoveries.

Suggested Citation

  • Alessandro Ferrari & Francisco Queirós, 2026. "Firm Heterogeneity, Market Power, and Macroeconomic Fragility," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(4), pages 429-467, October.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:4:p:429-67
    DOI: 10.1257/mac.20230033
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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