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Credit within the firm

Review of Economic Studies, ISSN: 0034-6527, Vol: 80, Issue: 1, Page: 211-247
2013
  • 43
    Citations
  • 0
    Usage
  • 82
    Captures
  • 0
    Mentions
  • 2
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    43
    • Policy Citations
      24
      • Policy Citation
        24
    • Citation Indexes
      19
  • Captures
    82
  • Social Media
    2
    • Shares, Likes & Comments
      2
      • Facebook
        2

Article Description

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. © The Author 2012. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.

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