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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The Color of Money: Federal vs. Industry Funding of University Research
September 2021
Working Paper Number:
CES-21-26
U.S. universities, which are important producers of new knowledge, have experienced a shift in research funding away from federal and towards private industry sources. This paper compares the effects of federal and private university research funding, using data from 22 universities that include individual-level payments for everyone employed on all grants for each university year and that are linked to patent and Census data, including IRS W-2 records. We instrument for an individual's source of funding with government-wide R&D expenditure shocks within a narrow field of study. We find that a higher share of federal funding causes fewer but more general patents, more high-tech entrepreneurship, a higher likelihood of remaining employed in academia, and a lower likelihood of joining an incumbent firm. Increasing the private share of funding has opposite effects for most outcomes. It appears that private funding leads to greater appropriation of intellectual property by incumbent firms.
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Pay, Employment, and Dynamics of Young Firms
July 2019
Working Paper Number:
CES-19-23
Why do young firms pay less? Using confidential microdata from the US Census Bureau, we find lower earnings among workers at young firms. However, we argue that such measurement is likely subject to worker and firm selection. Exploiting the two-sided panel nature of the data to control for relevant dimensions of worker and firm heterogeneity, we uncover a positive and significant young-firm pay premium. Furthermore, we show that worker selection at firm birth is related to future firm dynamics, including survival and growth. We tie our empirical findings to a simple model of pay, employment, and dynamics of young firms.
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IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence
March 2012
Working Paper Number:
CES-12-07
We develop a new rationale for IPO waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.
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ENFORCING COVENANTS NOT TO COMPETE: THE LIFE-CYCLE IMPACT ON NEW FIRMS
June 2014
Working Paper Number:
CES-14-27
We examine the impact of enforcing non-compete covenants (CNC) on the formation and performance of new firms using matched employer-employee data on 30 US states. To identify the impact of CNC, we exploit the inter-state variation in CNC enforcement along with the fact that courts do not enforce such covenants between law firms and departing lawyers in any state. Using a difference-in-difference-in-difference specification with law firms and firms that are not withinindustry spinouts as the baseline, we find states with stricter CNC enforcement have fewer, but larger within-industry spinouts that are more likely to survive their nascent years, and conditional on survival, grow faster during those years. These results are consistent with CNC enforcement having a selection effect on within-industry spinouts. Particularly, with stricter enforcement, only founders with higher-quality ideas and resources choose to overcome CNC-related barriers, which reduces entry rate but increases observed short-term performance of these spinouts.
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How is Value Created in Spin-Offs? A Look Inside the Black Box
July 2005
Working Paper Number:
CES-05-09
Using a unique sample of plant level data from the Longitudinal Research Database (LRD), we identify (for the first time in the literature), how (the precise channel and mechanism), where (parent or subsidiary), and when (the dynamic pattern) performance improvements arise following corporate spinoffs. We identify the source of value improvements in spin-offs by comparing the magnitude of post-spinoff changes in the wages, employment, materials costs, rental and administrative expenses, sales, and capital expenditures in the plants belonging to firms undergoing spin-offs relative to the magnitude of such changes in a control group of plants belonging to firms not undergoing spin-offs. We show that the total factor productivity (TFP) of plants belonging to spin-off firms (parent or spun-off subsidiary) increase, on average, following the spin-off. This increase in overall productivity begins immediately, starting with the first year following the spin-off, and continuing in the years thereafter. This performance improvement can be attributed to a decrease in workers' wages, employment at the plant, decrease in the cost of materials purchased, as well as a decrease in rental and office expenditures, but not from improved product market performance by these plants. Further, such productivity improvements arise primarily in plants that remain with the parent; plants belonging to the spun-off subsidiary do not experience such productivity increases. However, contrary to speculation in the previous literature, plants that are spun-off do not underperform parent plants prior to the spin-off. Finally, in our split-sample study of plants that were acquired subsequent to the spin-off and those that were not, we find that productivity increases for both groups of plants: while such productivity increases start immediately after the spin-off for the nonacquired plants, for the acquired plants they occur only after being taken over by a better management team.
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Where Have All the "Creative Talents" Gone?
Employment Dynamics of US Inventors
April 2023
Working Paper Number:
CES-23-17
How are inventors allocated in the US economy and does that allocation affect innovative capacity? To answer these questions, we first build a model where an inventor with a new idea has the possibility to work for an entrant or incumbent firm. Strategic considerations encourage the incumbent to hire the inventor, offering higher wages, and then not implement her idea. We then combine data on 760 thousand U.S. inventors with the LEHD data. We find that when an inventor is hired by an incumbent, their earnings increases by 12.6 percent and their innovative output declines by 6 to 11 percent.
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The Work Disincentive Effects of the Disability Insurance Program in the 1990s
February 2006
Working Paper Number:
CES-06-05
In this paper we evaluate the work disincentive effects of the Disability Insurance program during the 1990s. To accomplish this we construct a new large data set with detailed information on DI application and award decisions and use two different econometric evaluation methods. First, we apply a comparison group approach proposed by John Bound to estimate an upper bound for the work disincentive effect of the current DI program. Second, we adopt a Regression-Discontinuity approach that exploits a particular feature of the DI eligibility determination process to provide a credible point estimate of the impact of the DI program on labor supply for an important subset of DI applicants. Our estimates indicate that during the 1990s the labor force participation rate of DI beneficiaries would have been at most 20 percentage points higher had none received benefits. In addition, we find even smaller labor supply responses for the subset of 'marginal' applicants whose disability determination is based on vocational factors.
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Dynamics of High-Growth Young Firms and the Role of Venture Capitalists
June 2025
Working Paper Number:
CES-25-38
Motivated by the substantial growth and upfront investments of venture capital (VC) backed firms observed in administrative US Census data, this paper develops a firm dynamics model over the life cycle. In the model, startups choose the source of financing from VC, Angel investors, or banks, depending on their growth potential, and invest in innovation. The calibrated model explains the life-cycle dynamics of firms with different sources of financing and implies that venture capitalists' advice accounts for around 22% of the growth of VC-backed firms. A counterfactual economy without VC financing would lose aggregate consumption by around 0.4%.
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Modeling Labor Markets with Heterogeneous Agents and Matches
May 2002
Working Paper Number:
tp-2002-19
I present a matching model with heterogeneous workers, firms, and worker-fim
matches. The model generalizes the seminal Jovanovic (1979) model to the case of
heterogeneous agents. The equilibrium wage is linear in a person-specific component,
a firm-specific component, and a match specific component that varies with tenure.
Under certain conditions, the equilibrium wage takes a simpler structure where the
match specific component does not vary with tenure. I discuss fixed- and mixedeffect
methods for estimating wage models with this structure on longitudinal linked
employer-employee data. The fixed effect specification relies on restrictive identification
conditions, but is feasible for very large databases. The mixed model requires less
restrictive identification conditions, but is feasible only on relatively small databases.
Both the fixed and mixed models generate empirical person, firm, and match effects
with characteristics that are consistent with predictions from the matching model; the
mixed model moreso than the fixed model. Shortcomings of the fixed model appear to
be artifacts of the identification conditions.
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Leveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors
January 2025
Working Paper Number:
CES-25-12
We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors.
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