Working Paper: NBER ID: w18516
Authors: 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.
Keywords: wrongful discharge laws; innovation; firm creation; employee protections
JEL Codes: G3; J5; J8; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| WDL (Y50) | innovation (O35) |
| good faith exception (Y20) | innovation (O35) |
| WDL (Y50) | new establishments (M13) |
| WDL (Y50) | job creation (J68) |