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Credit within the Firm

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  • Luigi Guiso
  • Luigi Pistaferri
  • Fabiano Schivardi

Abstract

We use variation in the degree of development of local credit markets and matched employer--employee data to assess the role of the firm as an internal credit market. We find that firms operating in less financially developed markets offer lower entry wages but faster wage growth than firms in more financially developed markets. This helps firms finance their operations by implicitly raising funds from workers. We control for local market fixed effects and only exploit time variation in the degree of local financial development induced by an exogenous liberalization, so that the effect we find is unlikely to reflect unobserved local factors that systematically affect wage--tenure profiles. We estimate that the amount of credit generated by implicit lending within the firm is economically important and can be as large as 30 percent of the bank lending. Consistent with credit market imperfections opening up trade opportunities within the firm, we find that the internal rate of return of implicit loans lies between the rate at which workers savings are remunerated in the market and the rate that firms pay on their loans from banks. Copyright , Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 1 ()
Pages: 211-247

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Handle: RePEc:oup:restud:v:80:y:2013:i:1:p:211-247

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Cited by:
  1. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR & CES & MSH, vol. 27(69), pages 5-55, 01.
  2. Selim Gulesci, 2012. "Labor-tying and poverty in a rural economy:evidence from bangladesh," Working Papers 460, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2012. "Exporting under Financial Constraints: Margins, Switching Dynamics and Prices," Development Working Papers 338, Centro Studi Luca d\'Agliano, University of Milano, revised 16 Jul 2012.
  4. Laurent Bach & Nicolas Serrano-Velarde, 2009. "The Power of Dynastic Commitment," Working Papers 0924, Oxford University Centre for Business Taxation.

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