Financial Inclusion, Economic Development, and Inequality: Evidence from Brazil

Abstract

We study a financial inclusion policy targeting Brazilian cities with low bank branch coverage using data on the universe of employees from 2000-2014. The policy leads to bank entry and to similar increases in both deposits and lending. It also fosters entrepreneurship, employment, and wage growth, especially for cities initially in banking deserts. These gains are not shared equally and instead increase with workers' education, implying a substantial increase in wage inequality. The changes in inequality are concentrated in cities where the initial supply of skilled workers is low, indicating that talent scarcity can drive how financial development affects inequality.

Dynamic Bank Expansion: Spatial Growth, Financial Access, and Inequality

“…17 In our empirical setting, the stable unit treatment value assumption (SUTVA) is likely not satisfied due to the spillover effects of branch openings on nearby regions, as indicated by the model developed in Section 3. Thus, rather than interpreting these estimates as capturing the treatment effect on the treated, it is more appropriate to Similar to the findings of Barboni, Field and Pande (2022) and Fonseca and Matray (2022), we estimate large effects of branch openings on employment and income. 18 These estimates are reasonable for Thailand during our study period because, before 1986, most markets had no branches and were virtually in a state of financial autarky.…”

“…While we do not have data for loan amounts, in principle, financial development can improve credit access through both the extensive margin (the fraction of households with credit access) and the intensive margin (loan amounts for those who already have access), e.g., Greenwood and Jovanovic (1990), , Wang (2013), andDabla-Norris et al (2021). For example, Fonseca and Matray (2022) exploit the expansion of government-owned banks in Brazil and estimate that opening a branch increases loans in treated cities by 1.7%-3.4% of local GDP. Nguyen (2019) estimates large negative local effects of branch interpret them as capturing the treatment effect on the treated relative to the control.…”

“…18 Using an experiment that randomizes bank branch placement over 870 villages in rural India, Barboni, Field and Pande (2022) estimate that household income and business sales increase by 14% and 21%, respectively, in treated villages. Fonseca and Matray (2022) estimate that the expansion of government-owned banks in Brazil increases firm employment in treated cities by 10% in 2 years, and the effect more than doubles in treated cities that were distant from existing banks before the expansion. Note: This table presents the estimates of the impact of opening bank branches on local economic variables using the DID method (equation (2.1)) on matched pairs of treatment and control markets.…”

“…To address these concerns, we apply the DID method to matched treatment and control markets (e.g., Jager and Heining, 2019;Smith et al, 2019;Fonseca and Matray, 2022). Specifically, we base our empirical estimation on the 1986-1996 period, which commences after the relaxation of the branching requirement in 1986.…”

“…Stein and Yannelis (2020) use data from Freedman's Savings Bank and find that individuals in a county with a branch are 13-17 percentage points more likely to hold an account than those living in a county without a branch. Fonseca and Matray (2022) exploit the expansion of government-owned banks in Brazil and estimate that opening a branch increases deposits in treated cities by 1.6%-2.4% of local GDP. Modeling distance-dependent portfolio adjustment costs enables us to incorporate the effect of bank expansion on aggregate savings, which constitutes the deposit channel of bank expansion.…”