Labor Laws and Innovation

Acharya, Viral V.; Baghai, Ramin; Subramanian, Krishnamurthy

doi:10.2139/ssrn.1333621

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Labor Laws and Innovation

46 Pages Posted: 27 Jan 2009 Last revised: 31 Jan 2010

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

There 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: Suggested Citation

Acharya, Viral V. and 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