Does Strengthening the Property Rights of Employee-Inventors Spur Innovation? Empirical Evidence on Freedom-to-Create Laws Passed by US States

Abstract

The incompleteness of employment contracts may leave inventors vulnerable to ex post opportunism by their employers, which could curtail their innovative effort. We use passage of freedom-to-create laws by seven US states as a natural experiment to investigate whether laws strengthening the property rights of inventors against employers’ opportunism can foster innovation. We employ a difference-in-differences design that includes a rich set of state, technology, and time fixed effects to compare the quantity and quality of patenting in these seven states vis-à-vis synthetic control states. The laws increased both the number of patents (by 14 percent) and their quality (according to various measures, including citations and the extent of pathbreaking innovation). The increase in innovation was broad, observed for both firm-specific and generic innovation and in firms with and without prior patents.