Poverty, competition, democracy, and ownership: A general equilibrium model with vertical preferences

• DOI: http://doi.org/10.1111/jpet.12413
• Published date: 01 December 2019
• Date: 01 December 2019

J Public Econ Theory. 2019;21:1143–1178. wileyonlinelibrary.com/journal/jpet © 2019 Wiley Periodicals, Inc.

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Received: 8 August 2019

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Accepted: 23 October 2019

DOI: 10.1111/jpet.12413

ORIGINAL ARTICLE

Poverty, competition, democracy, and

ownership: A general equilibrium model with

vertical preferences

Amani Kahloul

1,2

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Rim Lahmandi‐Ayed

2

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Hejer Lasram

1,3

1

University of Sousse, FSEG Sousse,

Sousse, Tunisia

2

University of Carthage, ESSAI and U.R.

MASE‐ESSAI, Tunisia

3

CBS, Université Tunis Carthage, Tunis,

Tunisia

Correspondence

Rim Lahmandi‐Ayed, U.R. MASE‐ESSAI,

University of Carthage, ESSAI, B.P 675, 6,

rue des métiers, La Charguia II, 1080,

Tunisia.

Email: rim.lahmandi.ayed@gmail.com

Abstract

We consider a general equilibrium model where

individuals are simultaneously workers, consumers,

and shareholders, with two possible market structures:

Monopoly and Duopoly, and two extreme ownership

structures: egalitarian and concentrated. Considering

three standard poverty indicators, the questions are,

whether more competition generates more or less

poverty for a given ownership structure; and whether

a democratic choice between Monopoly and Duopoly

leads to the alternative with less poverty. When the

ownership is concentrated, we show that Duopoly

generates less poverty than Monopoly and the majority

votes for the alternative with less poverty. When the

ownership is egalitarian, Duopoly may generate more or

less poverty and democratic choice alleviates poverty

regarding at least one poverty indicator and worsens

poverty regarding at least another one, the three poverty

indicators never converging. An empirical study on the

effect of competition on poverty supports to some extent

our theoretical findings.

KEYWORDS

competition, democracy, general equilibrium, ownership structure,

poverty, vertical differentiation

JEL CLASSIFICATION

I32; J4; L13

If a free society cannot help the many who are poor,

it cannot save the few who are rich.

John F. Kennedy—Inaugural Address, January 20, 1961

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INTRODUCTION

This paper deals with the relation between competition and poverty on the one hand and

between democracy and poverty on the other hand. Regarding competition and poverty, some

recent empirical studies, confirming the well‐known theoretical result that less competition

hurts consumers, evaluate specifically the effects of a limited competition on poor consumers’

welfare in different settings and prove that higher prices of consumption goods are more

detrimental to poor households (Argent & Begazo, 2015; Hausman & Leibtag, 2007). Less

competition hurts workers as well, since fewer firms have more market power as purchasers of

labor (Azar, Marinescu, & Steinbaum, 2017; Brummund, 2013; Webber, 2015). This is true

when workers do not have high bargaining power, which should be the case in poor countries

where regulations of the labor market are generally not very favorable to workers.

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Now, when

individuals are potentially at the same time consumers, workers, and shareholders, the effect is

not obvious, especially when the population is heterogeneous and especially when we are

interested in the poorest stratum of the population.

Regarding democracy and poverty, according to Kofi Annan in his speech at the 2017 Athens

Democracy Forum

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,“democracy remains a universal aspiration. Why? Because it actually delivers:

of the 20 countries with highest levels of human development as measured by the UN’shuman

development index, 19 are liberal democracies.”There are some papers on the relation between

democracy and poverty. But, to the best of our knowledge, all of them are empirical and deal only

with the effect of indirect democracy on poverty, where people elect representatives to make laws

and choose policies on their behalf. They say nothing on whether the majority would choose the

alternative with less poverty if it was given the choice, neither in empirical nor in theoretical terms.

Our purpose in this paper is twofold. Considering a simple general equilibrium model, the

first question is whether more competition (Duopoly vs. Monopoly) generates more or less

poverty, for a given ownership structure, w.r.t. three traditional income‐based poverty

indicators, considering explicitly the multiple roles played by individuals. The second question

is whether the direct democratic choice between Monopoly and Duopoly leads to the alternative

with the lowest levels of poverty.

A study of the OECD (2013) on the question of poverty and competition relevantly draws

attention on the importance of the multiple roles played by the individuals. Indeed the

percentage of the poor earning a living from a self‐employed small business may be high (69%

in Peru among the urban poor households, for instance) and the matter may get more

complicated when people may derive income from several sources: as workers and as small

business owners (this is the case for 47% of poor urban households in Cote d’Ivoire and

Indonesia). The OECD (2013) study notes then that “stronger competition creates losers as well

as winners,”which is confirmed by Warr (2005) who considers a general equilibrium model to

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Spector (2004) proves, however, that the effect of the intensification of competition on workers depending on their bargaining power, may cause wages to fall

when the social system tends to be protective of workers. See also Blanchard and Giavazzi (2003).

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https://www.kofiannanfoundation.org/supporting‐democracy‐and‐elections‐with‐integrity/athens‐democracy‐forum/

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KAHLOUL ET AL.

study the effects of a ban on rice imports in Indonesia. Indeed he proves that it increases

poverty while benefitting to “the richest rural residents who may be landowners but also tend

not to be farmers and some better‐off urban consumers,”confirming the importance of the roles

played by the individuals in the considered markets (consumers, workers, and shareholders)

and of the ownership structure. It also proves the necessity to consider a general equilibrium

model to tackle all these effects. A recent literature review by Begazo and Nyman (2016) on

poverty and competition concludes indeed that “the fact that most households perform more

than one function in the market is fundamental to understanding the distributional impact of

competition reforms”and that “moving from partial equilibrium to general equilibrium

analysis and incorporating the effect of high market power on employment, wages, and capital

returns, would provide more complete conclusions.”

The merits of democracy on development issues are highlighted by many authors and

personalities. For instance, Harber (2002) suggests that authoritarian governance in Africa has

exacerbated poverty levels and that the fastest growing countries in Africa are Botswana and

Mauritius whichhave the longest record of democraticrule. However, on the one hand, the set up

of democracy may not be sufficient to solve the poverty problems. This is what is implicitly

implied by Nelson Mandela when he said

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“Our democracy must bring its material fruits to all,

particularly, the poor, the marginalized and the vulnerable.”On the other hand, the existing

studies do not distinguish representative democracy from direct or participatory democracy, and

since representative democracy remains the mostcommon form of democracy, as a matter of fact,

it is the object of the major partof the existing studies. But from the sixties,social movements put

back on the table the participatory democracy concept (Hilmer, 2010; Kaufman, 1969; Menser,

2018; Miller, 1987). Pateman (1970) organized in her “Participation and democratic theory”the

participatorydemocracy in the assembly of citizens also called mini‐publics.Since 80s, this theory

was upheld by governmental and nongovernmental institutions operating in the humanitarian

and development fields (World Bank, 1996, 2007) and numerous experiences implying

participatory decision or control by citizens have been implemented all around the world,

starting from Brazil in the eighties (Sa Vilas Boas, 2017) and spreading afterward in Europe

(Montambeault, 2015; Pateman, 2012). However, as Hilmer (2010) put it, one cannot argue “that

participatory democracy is necessarily more progressive, inherently more valuable, or generally

superior to other forms or theories of democracy”before investigating in‐depth the theory and

conducting empirical tests. There are indeed too few papers funding theoretically or empirically

the growing interest for participatory democracy in general, and in particular to solve

development issues. We intend in this paper to contribute to the reflection on this subject.

We consider a general equilibrium model with three goods, one or two firms producing

vertically differentiated products using labor as the unique input and a population of workers/

consumers/shareholders. Individuals are supposed to be continuously distributed with respect

to two characteristics: their sensitivity to effort and their intensity of preference for the product

quality. We consider two extreme ownership structures: Egalitarian where all individuals share

equally the firms’capital and concentrated where the owners of the firm(s) are negligible in the

total population. We adopt three indicators widely used in the literature and related to the

poorest stratum of the population, derived respectively, from Income Floor (IF; the lowest

income), the Poorest (population having the lowest income) and the Income Poor Population

Size (IPPS; population having an income lower than some given poverty line).

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during a joint sitting of Parliament to mark 10 Years of Democracy, Parliament, Cape Town, South Africa, May 10, 2004.

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