Holdup, Knowledge Transferability, and Productivity: Theory and Evidence from Knowledge Workers*

Abstract

This article studies how firing costs affect the productivity of knowledge workers. We develop a holdup model in which workers are essential to knowledge transfer between firms and show that if the worker's knowledge stock is sufficiently transferable to competing firms, an increase in firing costs inhibits the firm's ability to hold up the worker and thereby leads to higher effort. We consider the passage of the wrongful discharge laws in the US as an exogenous increase in firing costs and test our theory using data on patents filed at the United States Patent and Trademark Office (USPTO).

Firing Costs and Inventor Turnover

“…Next, following Ekinci and Wehrheim (2022), we employ citation-based measures for the degree of knowledge transferability. Specifically, we consider the ratio of self-citations to total citations (i.e., the average of the ratio between citations to patents assigned to the current employer and citations to patents assigned to external firms) and the ratio of unique self-citations to total unique citations (i.e., the ratio between unique citations to patents assigned to the current employer and unique citations to patents assigned to external firms).…”

“…Our empirical analysis is motivated by Ekinci and Wehrheim (2022) who build a holdup model to examine inventor-level productivity. As in Acharya et al (2014), the firm has an incentive to discharge the inventor even if he or she performs well; however, they focus on the inventor's role in knowledge transfer across firms as a specific mechanism that leads to a holdup problem.…”

“…The current paper focuses on knowledge workers (i.e., inventors) and studies how the legal changes in the standard for discharging employees affect their turnover. Following the literature (e.g., MacLeod & Nakavachara, 2007;Acharya et al, 2014;Ekinci & Wehrheim, 2022;Bena et al, 2022), we consider the adoption of the wrongful discharge laws (WDLs) (particularly, that of the good faith law) in the US as an increase in firing costs and investigate how they alter inventor turnover.…”

“…To guide our empirical analysis, we rely on the holdup models built by Acharya et al (2014) and Ekinci and Wehrheim (2022). The main feature of these models is that worker effort is a firm-specific investment because the firm can fire the worker before he or she reaps full benefits from effort.…”

“…Both papers show that increased firing costs raise productivity because they weaken the firm's incentive to fire the inventor, thereby mitigating the holdup problem. Departing from Acharya et al (2014), Ekinci and Wehrheim (2022) focus on the role of labor mobility on knowledge transfer across firms as a specific mechanism that leads to the holdup problem. They then show that the effect of firing costs on productivity depends on the extent to which the inventor can transfer his or her knowledge stock to competing firms.…”