Wrongful Discharge Laws and Innovation

Viral Acharya, Ramin P. Baghai and Krishnamurthy Subramanian

No 18516, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G3 J5 J8 K31 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-ent, nep-ino and nep-ppm
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Published as 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.

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Journal Article: Wrongful Discharge Laws and Innovation (2014)
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