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Wrongful Discharge Laws and Innovation

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

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
Note: CF LE
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