Working Paper: NBER ID: w15924
Authors: Luigi Pistaferri; Luigi Guiso; Fabiano Schivardi
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.
Keywords: Credit Markets; Wage Contracts; Implicit Lending
JEL Codes: G3; J3; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less developed credit markets (G19) | lower starting wages (J31) |
| less developed credit markets (G19) | faster wage growth (J39) |
| lower starting wages (J31) | implicit borrowing from workers (F16) |
| financial backwardness index (G20) | wage growth (J31) |
| poor access to credit (G21) | steeper wage profiles (J31) |
| better access to credit (G21) | steeper wage profiles (J31) |
| implicit loans (H81) | internal rate of return (G31) |