Market competition and poverty dynamics: Short and long run effects across financial development levels

TL;DR

This study uses advanced econometric methods to analyze how market competition affects poverty over time across different levels of financial development, revealing complex, lagged, and heterogeneous effects.

Contribution

It introduces a functional econometric framework to capture dynamic and lagged effects of market competition on poverty, uncovering heterogeneity across countries with different financial development levels.

Findings

Stronger competition initially increased poverty during structural adjustments.

The adverse impact of competition weakened after 2010 as economies adapted.

Heterogeneous effects observed: positive lagged effects in low- and medium-MCAP economies, insignificant in high-MCAP economies.

Abstract

This paper investigates how market competition influences poverty dynamics using a functional econometric framework that captures both contemporaneous and lagged effects. Using annual data for 48 countries from 1991-2017, we estimate function-on-function regressions linking poverty headcount ratios to market concentration and other macroeconomic indicators. The results show that, based on the entire sample, stronger competition initially increased poverty during structural adjustment phases, but its adverse impact weakened after 2010 as economies adapted and efficiency gains emerged. The estimated bivariate surfaces reveal that the effect of competition on poverty often persists over multiple years (around 5 years), highlighting the importance of intertemporal transmission. Then, functional clustering based on market capitalization (MCAP) uncovers strong heterogeneity: pro-poor 5-years lagged effect of competition in low- and medium-MCAP economies, while it remains insignificant to weakly negative in high-MCAP countries. Overall, the findings underscore the value of functional data methods in uncovering evolving and lag-dependent poverty-competition linkages that static panel models fail to capture.