Wrongful Discharge Laws and Innovation

54 Pages Posted: 16 Mar 2010 Last revised: 13 Jan 2015

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

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Ramin Baghai

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 2012

Abstract

We show that wrongful discharge laws - laws that inhibit the common-law doctrine of "employment-at-will" - spur innovation. In our model, wrongful discharge laws make it costly for firms to arbitrarily discharge employees. This enables firms to commit to not punish short-run failures of employees and thereby encourage employees to exert greater effort in risky but potentially mould-breaking projects. We provide supporting empirical evidence using the staggered adoption of wrongful discharge laws across the U.S. states. Using difference-in-difference tests, we show that firms and employees in the affected states engage in greater innovation, measured by the number of patents filed, citations to these patents, and the number of patents and citations per employee and per dollar of R&D expense. Using a novel dataset, we also document a "creative destruction" in the affected states: we find more new firms being created and more existing firms being destroyed, with an increase in both job creation and job destruction.

Keywords: Dismissal laws, R&D, Technological change, Law and finance, Entrepreneurship, Growth, Creative destruction

JEL Classification: F3, G31, J5, J8, K31

Suggested Citation

Acharya, Viral V. and Subramanian, Krishnamurthy and Baghai, Ramin, Wrongful Discharge Laws and Innovation (April 2012). Available at SSRN: https://ssrn.com/abstract=1570663 or http://dx.doi.org/10.2139/ssrn.1570663

Viral V. Acharya

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

Krishnamurthy Subramanian

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

Hyderabad, Gachibowli 500 019
India

Ramin Baghai (Contact Author)

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

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