Labor Laws and Innovation

46 Pages Posted: 9 Mar 2009 Last revised: 22 Dec 2013

See all articles by Viral V. Acharya

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; Centre for Economic Policy Research (CEPR); Swedish House of Finance

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 4 versions of this paper

Date Written: February 1, 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 dis-continuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act.

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

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

Suggested Citation

Acharya, Viral V. and Baghai, Ramin and Subramanian, Krishnamurthy, Labor Laws and Innovation (February 1, 2009). NYU Working Paper No. FIN-08-034. Available at SSRN: https://ssrn.com/abstract=1354521

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
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)

London
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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Krishnamurthy Subramanian

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

Hyderabad, Gachibowli 500 019
India

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