We use nationally representative survey data from Mexico to compare households with savings accounts in formal financial institutions to their neighbors who do not have such accounts. The survey was conducted in 2005 and contains information on nearly 5000 households. We find that while neighboring banked and unbanked households have similar demographic and occupational profiles, the former are more educated and have markedly larger wealth. The median banked household spends 32% more per capita than the median unbanked household, and the median per capita wealth in banked households is 88% higher than that in unbanked households. The distribution of income looks similar across banked and unbanked households, except at the right tails, and in regressions in which we control for neighborhood fixed effects, income is associated with less than 5% of the variation in the decision to open an account. Our findings suggest that education levels, wealth and unobserved household attributes which might be correlated with wealth and education play a major role in explaining participation in the formal financial sector.
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