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Wrongful Discharge Laws and Innovation

Viral V. Acharya¹; Ramin Baghai²; Krishnamurthy Subramanian³

¹ Center for Economic and Policy Research · ² Stockholm School of Economics · ³ Indian School of Business

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 holdup, 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 U.S. states.

DOI

10.1093/rfs/hht009

Volume

27 (1)

Pages

301-346

Language

en

Export

BibTeX

Sources

crossref openalex