Wrongful Discharge Laws and Innovation
We show that wrongful discharge laws - laws that protect employees against unjust dismissal - spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of hold-up, these laws enhance employees' innovative efforts and encourage firms to invest in risky, but potentially mould-breaking, projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across the U.S. states.
We are grateful to Hanh Le and Ajay Yadav for excellent research assistance, to Jason Sturgess for his kind help with the BEA data, Milo Bianchi (Third Paris Spring Corporate Finance Conference discussant), Thomas Chemmanur, Gustavo Manso, and Amit Seru (EFIC Discussant) as well as seminar and conference participants at the American Law and Economics Annual Meeting (2009), the Indian School of Business, the Entrepreneurial Finance and Innovation Conference 2010 (EFIC), and the Third Paris Spring Corporate Finance Conference 2011 for valuable comments and suggestions. We would also like to thank Ashwini Agrawal and David Matsa for sharing with us their data on state unemployment insurance benefits. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Viral V. Acharya & Ramin P. Baghai & Krishnamurthy V. Subramanian, 2014. "Wrongful Discharge Laws and Innovation," Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 301-346, January. citation courtesy of