The social cost of firm response to political risk: Evidence from wage theft

We show that in response to political risk firms increase social costs to employees through wage theft. Political risk increases firms perceived concerns about future cash holdings, leading them to impose social externalities on society by reducing employee pay to mitigate these concerns. Tests to control for the endogenous nature of our setting suggest that the relation between political risk and wage theft is likely causal. This effect is short-term, attenuated in the presence of monitoring by major customers and government contractors and more pronounced in the presence of financial constraints. Finally, we show that wage theft is a substitute for a reduction in investment and employment due to an increase in political risk. Our results inform the recent discussions on the importance of the Wage Theft Accountability Act.