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

69 Pages Posted: 10 Feb 2020

See all articles by Sabrina Howell

Sabrina Howell

New York University (NYU) - Leonard N. Stern School of Business

J. David Brown

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

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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.

Keywords: earnings inequality, rent sharing, R&D grants, regression discontinuity design

JEL Classification: G32, G35, J31, J41

Suggested Citation

Howell, Sabrina and Brown, J. David, Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms. IZA Discussion Paper No. 12942. Available at SSRN: https://ssrn.com/abstract=3534490

Sabrina Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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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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