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Wrongful Discharge Laws and Innovation

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18516.

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Date of creation: Nov 2012
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Publication status: 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.
Handle: RePEc:nbr:nberwo:18516
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Find related papers by JEL classification:
  • G3 - Financial Economics - - Corporate Finance and Governance
  • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
  • J8 - Labor and Demographic Economics - - Labor Standards
  • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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Cited by:

  1. Kerr, William R. & Nanda, Ramana, 2015. "Financing innovation," Research Discussion Papers 28/2015, Bank of Finland.
  2. Andreas Bastgen & Christian Holzner, 2015. "Employment Protection and the Market for Innovations," CESifo Working Paper Series 5275, CESifo Group Munich.
  3. Seru, Amit, 2014. "Firm boundaries matter: Evidence from conglomerates and R&D activity," Journal of Financial Economics, Elsevier, vol. 111(2), pages 381-405.
  4. Filippo Belloc, 2016. "Employee Representation Legislations and Innovation," Working Papers 2016.04, Fondazione Eni Enrico Mattei.
  5. Addison, John T. & Teixeira, Paulino & Evers, Katalin & Bellmann, Lutz, 2013. "Collective Bargaining and Innovation in Germany: Cooperative Industrial Relations?," IZA Discussion Papers 7871, Institute for the Study of Labor (IZA).
  6. Hsu, Po-Hsuan & Tian, Xuan & Xu, Yan, 2014. "Financial development and innovation: Cross-country evidence," Journal of Financial Economics, Elsevier, vol. 112(1), pages 116-135.
  7. Acharya, Viral V & Xu, Zhaoxia, 2014. "Financial Dependence and Innovation: The Case of Public versus Private Firms," CEPR Discussion Papers 9829, C.E.P.R. Discussion Papers.
  8. Viral V. Acharya & Zhaoxia Xu, 2013. "Financial Dependence and Innovation: The Case of Public versus Private Firms," NBER Working Papers 19708, National Bureau of Economic Research, Inc.
  9. Ghaly, Mohamed & Dang, Viet Anh & Stathopoulos, Konstantinos, 2015. "Cash holdings and employee welfare," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 53-70.
  10. Bertoni, Fabio & Tykvová, Tereza, 2015. "Does governmental venture capital spur invention and innovation? Evidence from young European biotech companies," Research Policy, Elsevier, vol. 44(4), pages 925-935.

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