Incentive Effects of Social Insurance Law on Corporate Innovation: Theory and Evidence

Abstract

Whether and how the design and enforcement of laws exerts a profound influence on innovation activities has been the central subject of study in a wide spectrum of disciplines. This paper examines the role of the social insurance law in driving corporate innovation. We consider a simple model wherein inventors transfer knowledge from one firm to another by job hopping and argue that mandatory social insurance contributions may decrease the mobility of inventors. This could implicitly incentivize firms to invest more in research and development (R&D), resulting in more patent output. To identify the incentive effect of social insurance law empirically, we examine data from China's A-share publicly listed firms for 2007-2017 and conduct a difference-in-differences estimation based on the enactment of China's Social Insurance Law in 2011. The empirical results were found to be consistent with the predictions of our theory.