Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms

71 Pages Posted: 2 Nov 2019 Last revised: 1 Apr 2020

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

J. David Brown

US Census Bureau Center for Economic Studies; IZA Institute of Labor Economics

Date Written: March 26, 2020

Abstract

This paper examines how employee earnings respond to a cash flow shock in the form of a government R&D grant. In a regression discontinuity design, we find that the grant increases average earnings with a rent-sharing elasticity of 0.07 at the employee level. The beneficiaries are incumbent employees, among whom the effect increases with worker tenure. The grant also leads to higher employment and revenue, but productivity growth cannot fully explain the immediate earnings effect. The evidence supports a mechanism where financially constrained firms borrow from employees, who initially accept relatively low wages and earn more when cash is available.

JEL Classification: G32, G35, J31, J41

Suggested Citation

Howell, Sabrina T and Brown, J. David, Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms (March 26, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3474633 or http://dx.doi.org/10.2139/ssrn.3474633

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J. David Brown

US Census Bureau Center for Economic Studies ( email )

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IZA Institute of Labor Economics

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