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The Real Effects of Banking the Poor: Evidence from Brazil

Author

Listed:
  • Julia Fonseca

    (University of Illinois at Urbana-Champaign)

  • Adrien Matray

    (Princeton University)

Abstract

We study how financial development affects economic development and wage inequality. We use a large expansion of government-owned banks into Brazilian cities with low bank branch coverage and combine it with data on the universe of employees from 2000–2014. We find that higher financial development fosters firm growth, higher labor demand, and higher average wages, especially for cities initially in banking deserts. However, these gains are not shared equally. Instead, they increase with workers’ productivity, implying a substantial increase in wage inequality. The changes to 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. Our results are inconsistent with alternative explanations such as differential exposure to Brazil’s economic boom, an overall increase in government lending, and other government or social welfare programs. These results motivate embedding skill heterogeneity into macro-finance development models in order to capture these distributional consequences.

Suggested Citation

  • Julia Fonseca & Adrien Matray, 2022. "The Real Effects of Banking the Poor: Evidence from Brazil," Working Papers 293, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:293
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    File URL: https://gceps.princeton.edu/wp-content/uploads/2022/04/wp293_Matray_Fonseca.pdf
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    Citations

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    Cited by:

    1. Garber, Gabriel & Mian, Atif & Ponticelli, Jacopo & Sufi, Amir, 2024. "Consumption smoothing or consumption binging? The effects of government-led consumer credit expansion in Brazil," Journal of Financial Economics, Elsevier, vol. 156(C).
    2. Nirupama Kulkarni & Kanika Mahajan & S.K. Ritadhi, 2023. "Bank Branch Expansions and Capital Investment by Credit Constrained Firms," Working Papers 93, Ashoka University, Department of Economics.
    3. Cheng, Hua & Ding, Siying & Liu, Yongzheng, 2024. "The effectiveness of entry deregulation: Novel evidence from removing minimum capital requirements," Journal of Development Economics, Elsevier, vol. 170(C).
    4. Natalie Bau & Adrien Matray, 2023. "Misallocation and Capital Market Integration: Evidence From India," Econometrica, Econometric Society, vol. 91(1), pages 67-106, January.
    5. Fang, Francis Haoyu & Vlaicu, Razvan, 2024. "Local Banking Supply and Private Firm Activity: Evidence from Branch Closures," IDB Publications (Working Papers) 13645, Inter-American Development Bank.

    More about this item

    Keywords

    Banking; Economic Development; Financial Development; Wage Inequality;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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