Firm Heterogeneity, Market Power and Macroeconomic Fragility
Alessandro Ferrari and
Francisco Queiros
CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy
Abstract:
We investigate how firm heterogeneity and market power affect macroeconomic fragility, defined as the probability of long-lasting recessions. We propose a theory in which the positive interaction between firm entry, competition and factor supply can give rise to multiple steady-states. We show that when firm heterogeneity is large, even small temporary shocks can trigger firm exit and make the economy spiral in a competition-driven poverty trap. Calibrating our model to incorporate the well-documented trends in increasing firm heterogeneity we find that, relative to 2007, an economy with the 1985 level of firm heterogeneity is 5 to 9 times less likely to experience a very persistent recession. We use our framework to study the 2008-09 recession and show that the model can rationalize the persistent deviation of output and most macroeconomic aggregates from trend, including the behavior of net entry, markups and the labor share. Post-crisis cross-industry data corroborates our proposed mechanism. Firm subsidies can be powerful in preventing quasi-permanent recessions and can lead to a 21% increase in welfare.
Keywords: Firm heterogeneity; Competition; Market power; Poverty traps; Great recession. (search for similar items in EconPapers)
JEL-codes: E22 E24 E25 E32 L16 (search for similar items in EconPapers)
Date: 2021-10-07
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-ore
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Related works:
Working Paper: Firm Heterogeneity, Market Power and Macroeconomic Fragility (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:627
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