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

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