Labor Laws and Innovation

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

Journal of Law and Economics, 2013, vol. 56, issue 4, 997 - 1037

Abstract: When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging employees and thereby limit employers' ability to hold up innovating employees after an innovation is successful. Therefore, dismissal laws can enhance employees' innovative efforts and encourage firms to invest in risky but potentially groundbreaking projects. Other forms of labor laws that do not affect dismissal of employees do not have this bright side. We find support for these predictions in empirical tests that exploit country-level changes in dismissal laws in the United States, the United Kingdom, France, and Germany: more stringent dismissal laws foster innovation, particularly in innovation-intensive industries, but other labor laws do not.

Date: 2013
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Citations: View citations in EconPapers (130)

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Related works:
Working Paper: Labor Laws and Innovation (2010)
Working Paper: Labor Laws and Innovation (2009)
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