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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27880
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| Title: | Labor Laws and Innovation |
| Authors: | Acharya, Viral
Baghai-Wadji, Ramin
Subramanian, Krishnamurthy |
| Issue Date: | 6-Feb-2009 |
| Series/Report no.: | FIN-08-034 |
| Abstract: | Can stringent labor laws be e¢ cient? Possibly, if they provide
firms with a commitment device to not punish employees' short-run
failures and thereby spur the pursuit of value-maximizing innovative
activities. In this paper, we provide empirical evidence that strong
labor laws indeed appear to have an ex ante positive incentive effect by
encouraging the innovative pursuits of firms and their employees. Using
patents and citations as proxies for innovation and a time-varying index
of labor laws, we find that innovation is fostered by stringent labor
laws, especially by laws governing dismissal of employees. We provide
this evidence using levels-on-levels, changes-on-changes, and finally
difference-in-difference regressions that exploit staggered
country-level law changes. We also find that stringent labor laws
disproportionately influence innovation in the more innovation-intensive
sectors of the economy. Finally, we find that while the overall effect
of stringent labor laws is to dampen economic growth, laws that govern
dismissal of employees are an exception: stringent laws governing
dismissal promote economic growth, consistent with the evidence that
they encourage firm-level innovation. |
| URI: | http://hdl.handle.net/2451/27880 |
| Appears in Collections: | Finance Working Papers
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