American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Firm Heterogeneity, Market Power, and Macroeconomic Fragility
American Economic Journal: Macroeconomics
(pp. 429–67)
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.Citation
Ferrari, Alessandro, and Francisco Queirós. 2026. "Firm Heterogeneity, Market Power, and Macroeconomic Fragility." American Economic Journal: Macroeconomics 18 (4): 429–67. DOI: 10.1257/mac.20230033Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- E22 Investment; Capital; Intangible Capital; Capacity
- E23 Macroeconomics: Production
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E25 Aggregate Factor Income Distribution
- E32 Business Fluctuations; Cycles