I heard an intriguing paper at the January 2020 AEA meetings in San Diego. It shows that a French labor market regulation discourages firm innovation. The abstract of the working paper version of the paper appears below.
We study the impact of labor regulation on innovation. We exploit the threshold in labor market regulations in France which means that when a firm reaches 50 employees, costs increase substantially. We show theoretically and empirically that the prospect of these regulatory costs discourages firms just below the threshold from innovating (as measured by patent counts). This relationship emerges when looking nonparametrically at patent density around the regulatory threshold and also in a parametric exercise where we examine the heterogeneous response of firms to exogenous market size shocks (from export market growth). On average, firms innovate more when they experience a positive market size shock, but this relationship significantly weakens when a firm is just below the regulatory threshold. Using information on citations we also show suggestive evidence (consistent with our model) that regulation deters radical innovation much less than incremental innovation. This suggests that with size-dependent regulation, companies innovate less, but if they do try to innovate, they “swing for the fence.”
The source of the abstract quoted above, is:
Aghion, Philippe, Antonin Bergeaud, and John Van Reenen. “The Impact of Regulation on Innovation.” 2019.