Bank Competition and Financial Inclusion: Evidence from Mexico

We document a positive relation between bank competition and the penetration of bank accounts at the local level in Mexico. To account for potential biases in our regressions due to the endogeneity of market structure, we employ a two-stage estimation approach that is based on an equilibrium structural model. Our preferred estimate implies that moving from a monopoly to a duopoly will lead to an increase of 972 accounts per 10,000 adults: a 40% increase over the cross-market mean. This is comparable to the effect of large increases in per capita income and years of schooling, or an increase of one branch per 10,000 adults by banks that are already present in the local market. We conclude that policies that facilitate bank competition should be given a prominent role in the financial inclusion agenda.