TY - JOUR AU - Pistaferri,Luigi AU - Guiso,Luigi AU - Schivardi,Fabiano TI - Credit within the firm JF - National Bureau of Economic Research Working Paper Series VL - No. 15924 PY - 2010 Y2 - April 2010 UR - http://www.nber.org/papers/w15924 L1 - http://www.nber.org/papers/w15924.pdf N1 - Author contact info: Luigi Pistaferri Department of Economics 579 Serra Mall Stanford University Stanford, CA 94305-6072 Tel: 650/724-4904 Fax: 650/725-5702 E-Mail: pista@stanford.edu Luigi Guiso Axa Professor of Household Finance Einaudi Institute for Economics and Finance Via Sallustiana 62 - 00187 Rome, Italy Fax: 39 06 4792 4858 E-Mail: luigi.guiso@eief.it Fabiano Schivardi University of Cagliari Viale S. Ignazio, 78 09123 Cagliari Italy E-Mail: schiva@stanfordalumni.org AB - 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. ER -