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Labor Laws and Innovation

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

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.

Suggested Citation

  • Viral V. Acharya & Ramin P. Baghai & Krishnamurthy V. Subramanian, 2013. "Labor Laws and Innovation," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 997-1037.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/674106
    DOI: 10.1086/674106
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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