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

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February 2020

Written by: J. David Brown, Sabrina T. Howell

Working Paper Number:

CES-20-06

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.

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endogeneity, payroll, quarterly, earnings, employee, employ, employed, revenue, incentive, tenure, wages employment, salary, employment wages, tax, irs, earn, earner, wage earnings, rent, earnings employees, earnings growth

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Internal Revenue Service, Longitudinal Business Database, Department of Energy, Initial Public Offering, University of California Los Angeles, Employer Identification Numbers, North American Industry Classification System, Net Present Value, Longitudinal Employer Household Dynamics, Technical Services, Census Bureau Business Register, Business Register, Individual Characteristics File, Census Bureau Disclosure Review Board, Kauffman Foundation, Disclosure Review Board, Data Management System

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