Does Strengthening the Property Rights of Employee Inventors Spur Innovation? Empirical Evidence on “Freedom to Create” Laws Passed by U.S. States

The incompleteness of employment contracts may leave inventors vulnerable to ex-post opportunism by their employers, curtailing their innovative effort. We investigate whether laws strengthening the property rights of inventors against employer opportunism can foster innovation using the passage of “freedom to create” laws by seven U.S. states as a natural experiment. 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-a'-vis synthetic control states. We find the laws increased both the number of patents (by 14\=%) and their quality (according to various measures, including citations and extent of path-breaking innovation). The increase in innovation was broad, observed for both firm-specific and generic innovation and in firms with and without prior patents.