Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms
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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Copy CitationSabrina T. Howell and J. David Brown, "Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms," NBER Working Paper 26717 (2020), https://doi.org/10.3386/w26717.Download Citation
Non-Technical Summaries
- After a firm wins a grant, workers' wages rise substantially, which is consistent with their having accepted lower wages in the...
Published Versions
Sabrina T Howell & J David Brown & Itay Goldstein, 2023. "Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms," The Review of Financial Studies, vol 36(5), pages 1889-1929. citation courtesy of 
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