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

Sabrina T. Howell () and J. David Brown ()
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Sabrina T. Howell: New York University

No 12942, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 (search for similar items in EconPapers)
JEL-codes: G32 G35 J31 J41 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2020-01
New Economics Papers: this item is included in nep-cfn, nep-lma and nep-sbm
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Working Paper: Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms (2020) Downloads
Working Paper: Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms (2020) Downloads
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