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

68 Pages Posted: 3 Feb 2020 Last revised: 3 Jul 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2020

Abstract

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 0.07 (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 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 financially constrained firms initially accept relatively low wages and are paid more when cash is available.

Suggested Citation

Howell, Sabrina T and Brown, J. David, Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms (January 2020). NBER Working Paper No. w26717, Available at SSRN: https://ssrn.com/abstract=3530688

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J. David Brown

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