Labor Laws and Innovation

46 Pages Posted: 27 Jan 2009 Last revised: 22 Dec 2013

Viral V. Acharya

New 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 Baghai

Stockholm School of Economics

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 4 versions of this paper

Date Written: 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.

Keywords: Labor laws, R&D, Technological change, Law and finance, Entrepreneurship, Growth

JEL Classification: F30, G31, J5, J8, K31

Suggested Citation

Acharya, Viral V. and Baghai, Ramin and Subramanian, Krishnamurthy, Labor Laws and Innovation (January 26, 2009). Available at SSRN: https://ssrn.com/abstract=1333621 or http://dx.doi.org/10.2139/ssrn.1333621

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Ramin Baghai

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Krishnamurthy Subramanian (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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