Wrongful Discharge Laws and Innovation

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.

Employment protection and the market for innovations

“…In this section we show that our model is able to reconcile the empirical findings that the introduction of wrongful dismissal laws in the US lead to a decrease in productivity as shown by Autor, Kerr, and Kugler (2007) and an increase in the number of active firms and the number of patents as shown by Acharya, Baghai, and Subramanian (2014). We start with deriving the main measures that we need in order to compare our calibration results with the empiricial findings of Autor, Kerr, and Kugler (2007) and Acharya, Baghai, and Subramanian (2014).…”

“…2 Akerlof (1984), Soskice (1997), Zoega and Booth (2003), Belot, Boone, and Ours (2007), Pierre and Scarpetta (2004), Wasmer (2006) and Acharya, Baghai, and Subramanian (2014) among others show that employment protection can have positive effects on productivity.…”

“…We start with deriving the main measures that we need in order to compare our calibration results with the empiricial findings of Autor, Kerr, and Kugler (2007) and Acharya, Baghai, and Subramanian (2014).…”

Trade Secrets and Innovation: Evidence from the 'Inevitable Disclosure' Doctrine

“…The net result is diminished inventor productivity. 6 Acharya et al (2013), for example, find that strengthened employee-friendly wrongful-discharge employment protection acts to spur innovation through reducing the potential of employer holdup.…”

Does Knowledge Protection Benefit Shareholders? Evidence from Stock Market Reaction and Firm Investment in Knowledge Assets

“…Previous studies primarily focus on the role of the enforcement of legal systems in the area of investor protection and show that strong law enforcement, which provides good legal protection to investors, also facilitates financial-market development and enhances firm valuation (see, e.g., La Porta, Lopezde-Silanes, Shleifer, and Vishny (1998), (2002)). Some recent studies focus on labor regulations and investigate the impacts on firm behavior (see, e.g., Fallick, Fleischman, and Rebitzer (2006), Marx, Strumsky, and Fleming (2009), Garmaise (2011), Acharya, Baghai and Subramanian (2013, Wang (2016), and Younge and Marx (2016) Serfling, and Srinivasan (2014) find that intellectual property protection affects firms' capital structure decision, and Leung, Mazouz, and Chen (2015) find that intellectual property protection benefits small firms by improving the liquidity of equity financing and reducing their costs of capital. Finally, Flammer, and Kacperczyk (2016) show that intellectual property protection affects firms' engagement in corporate social responsibility.…”