We study an incentive model of financial intermediation in which firms as well as intermediaries are capital constrained. We analyze how the distribution of wealth across firms, intermediaries, and uninformed investors affects investment, interest rates, and the intensity of monitoring. We show that all forms of capital tightening (a credit crunch, a collateral squeeze, or a savings squeeze) hit poorly capitalized firms the hardest, but that interest rate effects and the intensity of monitoring will depend on relative changes in the various components of capital. The predictions of the model are broadly consistent with the lending patterns observed during the recent financial crises.

Salary data from a single firm are analyzed in an effort to identify the firm's wage policy. We find that employees are partly shielded against changes in external market conditions; that wage variation within a job level is large both cross-sectionally and for individuals over time, often leading to substantial real wage declines; that wage increases are serially correlated even controlling for observable characteristics; and that promotions and wage growth are strongly related, even though promotion premiums are small relative to the large wage differences between job levels. None of the major theories of wage determination can alone explain the evidence.

We analyze twenty years of personnel data from one firm. The hierarchical structure is quite simple and stable. Career movements suggest that the employee's rate of learning and the firm's learning about ability are important. There are promotion “fast tracks.” Exit rates vary little with tenure or salary. The firm has personnel policies like those described in the internal labor markets literature, although several theoretical preconditions for ILMs, such as ports of entry and exit, are lacking. Job levels are important to compensation, but there is also substantial individual variation in pay within levels. Our companion paper (in this issue) explores the wage policy of this firm.