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We study how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long slumps. We propose a theory where the positive interaction between firm entry, competition, and factor supply can give rise to multiple steady-states. We show that when firms are highly heterogeneous in terms of productivities, 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 well-documented trends on rising firm heterogeneity in the US economy, and show that they significantly increase the likelihood and length of slow recoveries.
