Abstract

Social programs are a key tool for income redistribution in developing countries. Yet deposit-account delivery of these funds is constrained by commercial banks' limited profitability in areas where beneficiaries concentrate, forcing a hybrid system in which banks serve where they operate and cash campaigns reach the rest. Public social banks---institutions prioritizing social objectives over profits---offer a direct delivery channel, but whether they displace private incumbents and erode their intermediation benefits remains uncertain. This paper examines the trade-off between centralizing delivery through the expansion of a credit-less social bank that manages social-program funds and provides fee-free deposit accounts and transaction services, versus keeping the existing hybrid model. Exploiting the staggered rollout of {Banco del Bienestar} branches across Mexican municipalities in an event-study design, we find that entry expands financial inclusion through physical infrastructure and a persistent rise in debit-card adoption. However, commercial banks are deterred from expanding their branch networks, with the crowding out effect concentrated among those that previously managed social-program deposits. A subsequent centralization of funds further shifts liquidity away from these banks. Tracing this deposit loss through matched credit registry and social security data, we find that affected banks tighten credit supply to connected firms, with downstream negative consequences for employment and wages.

For Information contact giulia.zenoni@unibocconi.it.