  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. 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 in 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. 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. We conclude by showing that firm subsidies can be powerful in
preventing long slumps and can lead to welfare gains between 10% and 50%.
