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Credit within the Firm

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  • Guiso, Luigi
  • Pistaferri, Luigi
  • Schivardi, Fabiano

Abstract

We exploit time 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. In less developed local credit markets firms can offer a flatter wage-tenure profile than firms in more developed credit markets to lend implicitly to their workers or offer a steeper profile to implicitly borrow from their workers. We find that firms located in less financially developed markets offer wages that are lower at the beginning of tenure and grow faster than those offered by firms in more financially developed markets, helping firms finance their operations by raising funds from workers. Because we control for local market effects and only exploit time variation in the degree of local financial development induced by an exogenous liberalization, the effect we find is unlikely to reflect unobserved local factors that systematically affect wage tenure profiles. The size of implicit loans is larger for firms with more problematic access to bank credit and workers less likely to face credit constraints. The amount of credit generated by implicit lending within the firm is economically important and can be as large as 30% of 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 firms pay on their loans from banks.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7793.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7793

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Keywords: financial frictions; Implicit contracts; tenure profile; wage setting;

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References

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Cited by:
  1. Laurent Bach & Nicolas Serrano-Velarde, 2009. "The Power of Dynastic Commitment," Working Papers, Oxford University Centre for Business Taxation 0924, Oxford University Centre for Business Taxation.
  2. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2011. "Exporting under financial constraints: margins, switching dynamics and prices," LEM Papers Series 2011/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  4. 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.

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