Working Paper: NBER ID: w26717
Authors: Sabrina T. Howell; J. David Brown
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: cash windfalls; wages; R&D grants; small firms; rent sharing
JEL Codes: G32; G35; J31; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government R&D grant (O38) | Backloaded wage contracts (J41) |
| Backloaded wage contracts (J41) | Employee earnings (J31) |
| Government R&D grant (O38) | Employee earnings (J31) |
| Government R&D grant (O38) | Incumbent employee earnings (J31) |
| Government R&D grant (O38) | Higher employment (J68) |
| Government R&D grant (O38) | Higher revenue (H27) |