We exploit time variation in the degree of development of local credit markets and matched workers-firm data with workers histories to assess the role of the firm as an internal loans market. By tilting the workers wage-tenure profile around their tenure-productivity profile, the firm can generate borrowing flows from workers to the firm (when the earnings profile is steeper than the productivity profile) or vice versa from the firm to the workers (when the earnings profile is fatter), thus compensating for the imperfect functioning of the loans market. We find that firms located in less financially developed areas offer wages that are lower at the beginning of tenure and higher at the end than those offered by firms in more financially developed markets, which helps firms finance their operations by raising funds from workers. This effect does not reflect unobserved local factors that systematically affect wage tenure profiles, since we control for local market effects and only exploit variation time variation in the degree of local financial development induced by effects of exogenous liberalization. The credit generated by implicit lending within the firm is economically important and can be as large as 30% of bank lending. Implicit contracts help more those firms that have a problematic access to the loans market and funds come more from workers with a stronger willingness to lend. Consistent with credit market imperfections opening a trade opportunity within the firm we find that the internal rate of return of implicit loans lies between the rate at which workers savings are remunerated and the rate firms pay on their loans from banks.
