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    Dismissal Laws, Innovation, and Economic Growth

    Subramanian, Krishnamurthy V. | May 2018
    Abstract
    I theoretically and empirically show that dismissal laws laws that impose hurdles on fi ring of employees spur innovation and thereby economic growth. Theoretically, dismissal laws make it costly for fi rms to arbitrarily discharge employees. This enables fi rms to commit to not punish short-run failures of employees. Because innovation is inherently risky and employment contracts are incomplete, dismissal laws enable such commitment. Speci cally, absent such laws, firms cannot contractually commit so ex-ante. The commitment provided by dismissal laws encourages employees to exert greater effort in risky, but path-breaking, projects thereby fostering fi rm-level innovation. I provide empirical evidence supporting this thesis using the discontinuity provided by the passage of the federal Worker Adjustment and Retraining Noti cation Act. Using the fact that this Act only applied to firms with 100 or more employees, I undertake difference-in-difference and regression discontinuity tests to provide this evidence. Building on endogenous growth theory, which posits that economic growth stems from innovation, I also show that dismissal laws correlate positively with economic growth. However, other forms of labor laws correlate negatively with economic growth and swamp the positive effect of dismissal laws.
    Citation
    Subramanian, Krishnamurthy V.. 2018. Dismissal Laws, Innovation, and Economic Growth. © Asian Development Bank Institute. http://hdl.handle.net/11540/8423.
    Keywords
    Cofinancing
    Development Financing
    Economic Development and Finance
    Finance
    Financial Advisory Services
    Financial Assistance
    Financial Support
    Credit Policy
    Credit Cooperatives
    Industrial Credit
    Commercial credit
    Commerce and Industry
    Intra-Industry Trade
    Large Scale Industry
    Labor
    ADB
    Self Financing
    Aid Financing
    Financial Aid
    Development Banks
    Project Impact
    Export Credit Financing
    Industrialization
    Industrial Economics
    Industrial Development
    Industrial Policy
    Research and Development
    Development Banks
    Asset allocation
    Investment management
    Commercial documents
    Credit control
    Credit allocation
    Capital market
    Developing countries
    Market share
    Labor
    Innovation
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    Citable URI
    http://hdl.handle.net/11540/8423
    Metadata
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    adbi-wp846.pdf (510.4Kb)
    Author
    Subramanian, Krishnamurthy V.
    Theme
    Finance
    Industry
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise