Cash Windfall Research Articles

How Do Cash Windfalls Affect Entrepreneurship? Evidence from the Spanish Christmas Lottery

Abstract We show cash windfalls affect the real economy by spurring entrepreneurship. We identify these effects using the Spanish Christmas Lottery, which provides a unique setting as prizes are geographically concentrated and distributed among thousands of households. We find higher start-up entry, job creation, and self-employment in winning regions. Consistent with a financial constraints channel, results are strongest in sectors relying on external finance and regions with limited credit access. Newly created firms are larger, more profitable, and survive longer. For existing firms, however, growth and profitability do not respond to lottery awards, but wages increase due to tighter labor markets.

Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects?

Liquidity Constraints, Cash Windfalls, and Entrepreneurship: Evidence from Administrative Data on Lottery Winners

Liquidity Constraints, Cash Windfalls, and Entrepreneurship: Evidence from Administrative Data on Lottery Winners

Unrestricted Cash Windfalls and Nonprofit Operating Outcomes

Unrestricted Cash Windfalls and Nonprofit Operating Outcomes

Shale shocked: Cash windfalls and household debt repayment

Using individual credit bureau data matched with cash windfalls from fracking, we estimate that windfall recipients reduce debt-to-income by 2.4 percentage points relative to no-windfall controls. Debt repayment effects are 3 times stronger for subprime individuals than for prime individuals. Based on the timing of upfront versus continuing cash payments, debt repayment coincides with the timing of payments but not with news about future payments. These findings present a challenge for purely forward-looking models of debt. Indeed, when we incorporate a windfall shock into a forward-looking model, the model predicts an increase in debt that runs counter to our evidence of debt repayment.

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

Abstract This paper examines how employee earnings respond to a one-time cash flow shock in the form of a government R&D grant. In a regression discontinuity design, we find that the grant immediately increases average annual employee-level earnings by 2.9$\%$. This benefit accrues only to incumbent employees and rises with job tenure. The grant also affects firm growth, but the initial wage patterns do not appear to reflect growth or productivity. Instead, the evidence supports implicit equity financing within the firm, where employees initially accept lower wages from financially constrained firms and earn more when the firm has ability to pay. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Composting municipal solid waste for agriculture in Northern Ghana: Rural farmers’ willingness to pay for compost quality and access attributes

Abstract While farmers in rural areas of northern Ghana find it difficult to obtain sufficient organic soil amendments to keep their soil healthy, there is not enough demand for city compost factories attempting to clean cities of organic solid waste to sustain the composting rate at waste-clearing levels. In this study, 398 farmers in rural communities were surveyed in order to estimate the willingness-to-pay for different quality and access attributes of municipal solid waste (MSW) compost and examine how demand for it can be boosted among such farmers. Several specifications of the generalized multinomial logit (G-MNL) model, using farmers’ choice data, revealed that the compost quality and market access attributes surveyed in the study significantly affect farmers’ decision to buy MSW compost. The results also showed that preferences for the attributes vary widely among the farmers, mainly due to some unobserved personal factors. On average, the empirical estimates indicate that for a 50 kg compost bag, farmers are willing to pay GHS 9.43 for brand/label, GHS 5.76 for pelletized compost, GHS 4.49 for delivery in the community, and GHS 2.49 for sales when they have their cash windfall. Farmers face an average disutility of at least GHS 33.36 for deciding not to buy compost, regardless of its attributes, indicating that besides the attributes captured by the study, other factors important to farmers influence their purchase decisions. Significantly discounted prices together with improved compost quality increase the probability of compost purchase. Thus, overall the findings highlight the need to subsidize MSW compost by more than 50 per cent, to sell it in pelletized form and branded/labelled packages while making it accessible to rural farmers during their cash windfall.

Personal Wealth, Self-Employment, and Business Ownership

Abstract We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur’s motivations.

More Cash, Less Innovation: The Effect of the American Jobs Creation Act on Patent Value

AbstractFirms can become less innovative following a sudden cash “inflow.” Specifically, multinational firms that were eligible to repatriate (and indeed repatriated) cash to the United States under the American Jobs Creation Act (AJCA) generate less valuable patents than otherwise similar firms. They also explore more. This effect only exists among firms in less competitive industries, firms with lower institutional ownership (IO), and firms with overconfident chief executive officers (CEOs); this effect is mainly driven by the reduction in the value of U.S.-originated patents. Our evidence suggests that, without appropriate governance, a cash windfall may lead managers to engage in riskier innovation strategy, which can destroy value.

Personal Wealth and Self-Employment

We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur’s motivations.

Sharing the Wealth: The Effects of TCJA Bonuses on Employee Pay Satisfaction

Many corporations shared their cash windfalls from the Tax Cuts and Jobs Act (TCJA) with rank-and-file employees through bonuses, higher wages, or increased benefits. We use novel data from Culture X to examine how the announcement of TCJA bonuses affects employee sentiment about their companies’ pay practices. Although employees are economically better off upon receiving these bonuses, prior literature suggests employees could be dissatisfied after receiving bonuses that they perceive as unfairly small. Using a difference-in-difference design, we find a greater decline in pay sentiment among employees at firms announcing a TCJA bonus relative to firms that do not. Consistent with dissatisfaction about receiving an unfairly small share of the company’s tax windfall, we document a larger decline in pay sentiment at announcing firms with larger increases in CEO bonuses and larger share repurchases around the TCJA. We provide new insights into how workers respond to changes in compensation stemming from corporate tax savings.

Shale Shocked: Cash Windfalls and Household Debt Repayment

How do persistent cash flow shocks affect debt repayment across the distribution of households? Using individual data on natural gas shale royalty payments matched with credit bureau data for 215,639 consumers, we estimate that individuals repay 33 cents of debt per dollar of windfall, and that initially-subprime individuals repay approximately 5 times more debt than initially-prime individuals do. This difference in debt repayment is driven by changes to revolving debt balances. Finally, we show that debt repayment precedes durable goods consumption, particularly for households who were initially financially constrained. These results shed new light on how deleveraging affects household consumption.

Shale Shocked: Cash Windfalls and Household Debt Repayment

Shale Shocked: Cash Windfalls and Household Debt Repayment

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.

Inter-Temporal Income-Shifting for Investment Reasons: Evidence From Private Firms

This paper examines the level and efficiency of private firms’ investments with respect to corporate tax cuts. Earlier research has focused mainly on public firms. Research into private firms is especially relevant since these companies tend to finance future growth through internal financing. Using a sample of 2,635 firm-year observations of private Spanish companies and a matched difference-in-differences analysis, our results show that private companies engaged in intertemporal income shifting to gain additional tax savings. However, this is only observed in cash-constrained firms that increased their investments immediately after the tax reform. Additionally, we provide evidence that the investments made by such firms are not always efficient. This is in line with the idea that firms receiving cash windfalls do not necessarily use them wisely.

Personal Wealth and Self-Employment

We examine how wealth windfalls affect self-employment decisions using data on cash payments from claims on Texas shale drilling to people throughout the United States. Individuals who receive large wealth shocks (greater than $50,000) have 51% higher self-employment rates. The increase in self-employment rates is driven by individuals who lengthen existing self-employment spells, and not by individuals who leave regular employment for self-employment. Moreover, the effect of wealth reverts for individuals whose payments run out. Rather than alleviating a financial constraint, our evidence suggests that unrestricted cash windfalls affect self-employment decisions primarily through self-employment’s non-pecuniary benefits.

Unlocking Trapped Foreign Cash, Investor Types, and Firm Payout Policy

I study whether trapped foreign cash levels and investor type explain variation in US-based multinationals’ payout policy responses to tax-repatriation-driven cash windfalls. To do so, I use the deemed mandatory repatriation of trapped foreign cash included in the 2017 Tax Cuts and Jobs Act (TCJA). I find my measure of the level of “unlocked” trapped foreign cash (UTC) relates to increases in repurchases and dividends observed post TCJA. I examine whether this increase in payout varies with institutional investor type: transient, dedicated, and quasi-indexers (Bushee 2001). I find that firms with high UTC and low (high) dedicated ownership see an increase (no change) in repurchases post TCJA. I do not observe similar variation with investor type for dividends. Finally, mechanism tests show that HI UTC, HI DED (LO DED) firms tend to have higher (lower) cash balances, lower (higher) payouts, and higher capital expenditures when previously capital constrained. This suggests that firms use UTC in a way that minimizes agency frictions through the presence of dedicated investors who serve as effective monitors in the setting. For this reason, HI UTC, LO DED firms have higher levels of share repurchases and lower cash balances once the UTC windfall arrives in an effort to mitigate agency frictions stemming from an inability to effectively monitor managers for the long-term.

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. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

More Cash Flows, More Options? The Effect of Cash Windfalls on Small Firms

Among the typical entrepreneurs in small firms, how do cash windfalls affect their entrepreneurial activities? What financial consequences exist for entrepreneurs and their businesses? We use hand-collected data in a novel setting that exploits the bonus that retailers earn when selling jackpot-winning lottery tickets. Cash windfalls have positive effects on the internal growth of the existing business. In particular, an additional $100,000 increases revenues by $36,561 and the number of employees by 0.87. Surprisingly, we find that the bonus also leads to new business creation in non-retail industries, which is associated with the closedown of existing businesses. Contrary to prior findings for non-entrepreneurs, cash windfalls do not lead to financial distress on entrepreneurs or their businesses. Both the internal growth and new business creation become stronger when owners own no real estate assets or reside in low-income ZIP codes. These findings, along with evidence of non-linear effects on entrepreneurial activity, are consistent with both financial constraints and wealth effects channels.

The effects of cash transfers on adult labor market outcomes

ᅟThe basic economic model of labor supply has a very clear prediction of what we should expect when an adult receives an unexpected cash windfall: they should work less and earn less. This intuition underlies concerns that many types of cash transfers, ranging from government benefits to migrant remittances, will undermine work ethics and make recipients lazy. We discuss a range of additional channels to this simple labor-leisure trade-off that can make this intuition misleading in low- and middle-income countries, including missing markets, price effects from conditions attached to transfers, and dynamic and general equilibrium effects. We use this as a lens through which to examine the evidence on the adult labor market impacts of a wide range of cash transfer programs: government transfers, charitable giving and humanitarian transfers, remittances, cash assistance for job search, cash transfers for business start-up, and bundled interventions. Overall, cash transfers that are made without an explicit employment focus (such as conditional and unconditional cash transfers, and remittances) tend to result in little to no change in adult labor. The main exceptions are transfers to the elderly and to some refugees, who reduce work. In contrast, transfers made for job search assistance or business start-up tend to increase adult labor supply and earnings, with the likely main channels being the alleviation of liquidity and risk constraints.JEL ClassificationO15, J22, I38, H23