Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms
57 Pages Posted: 2 Nov 2019 Last revised: 5 Dec 2019
Date Written: December 3, 2019
This paper examines how employee earnings at small firms respond to a cash flow shock in the form of a government R&D grant. We use ranking data on applicant firms, which we link to IRS W2 earnings and other U.S. Census Bureau datasets. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.09 (0.21) at the employee (firm) level. The beneficiaries are incumbent employees who were present at the firm before the award. Among incumbent employees, the effect increases with worker tenure. The grant increases within-firm wage inequality, in part because new hires earn less than the firm average. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate effect on earnings. Instead, the data and a grantee survey are consistent with a backloaded wage contract channel, in which employees of a financially constrained firm initially accept low wages and are paid more when cash is available.
JEL Classification: G32, G35, J31, J41
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