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Labor Laws and Innovation

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

Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16484.

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Date of creation: Oct 2010
Date of revision:
Publication status: published as “Labor Laws and Innovation” with Ramin Baghai and Krishnamurthy Subramanian, Journal of Law and Economics , 2013, 56, 997-1037.
Handle: RePEc:nbr:nberwo:16484
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