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Labor Laws and InnovationViral V. AcharyaNew York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance Ramin BaghaiStockholm School of Economics Krishnamurthy SubramanianIndian School of Business (ISB), Hyderabad January 26, 2009 Abstract: We provide empirical evidence that strong dismissal laws appear to have a positive effect on the innovative pursuits of firms and their employees. Stringent labor laws provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify the effect of dismissal laws by exploiting the time-series variation generated by staggered country-level law changes. Using fixed effect panel regressions and difference-in-difference tests, we find that innovation is fostered by stringent laws governing dismissal of employees. In addition, stringent dismissal laws disproportionately influence innovation in the more innovation-intensive sectors of the economy. Finally, we complement our cross-country results with firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act.
Number of Pages in PDF File: 46 Keywords: Labor laws, R&D, Technological change, Law and finance, Entrepreneurship, Growth JEL Classification: F30, G31, J5, J8, K31 working papers seriesDate posted: January 27, 2009 ; Last revised: June 9, 2010Suggested CitationContact Information
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