NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Labor Laws and Innovation

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

NBER Working Paper No. 16484
Issued in October 2010
NBER Program(s):   CF   IFM   LE   LS

Stringent labor laws can 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 this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.

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Document Object Identifier (DOI): 10.3386/w16484

Published: “Labor Laws and Innovation” with Ramin Baghai and Krishnamurthy Subramanian, Journal of Law and Economics , 2013, 56, 997-1037.

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