Exit, Voice & Innovation: How Human Capital Policy Equality (& How Inequality Hurts Growth)

Abstract

If an employee believes her organization is failing, she can take action using one of two strategies: exit (leaving the company) or voice (advocating change from within). But what happens when both exit and voice are restricted? Change itself–including both innovation and equality–suffers. This article, written for the 24th Annual Frankel Lecture, investigates the connections between fields that are usually kept separate: intellectual property and innovation policy; antitrust law and market competition; employment law and contract norms; and anti-discrimination law and equality policy. In employment, non-disclosure agreements (NDAs), non-compete agreements, innovation assignment clauses, non-disparagement agreements, mandatory arbitration, and secrecy policies all create exit constraints. These restrictive clauses also serve to silence employees, inventors, creators, and entrepreneurs from speaking up and from expressing themselves creatively. These trends impede mobility in the job market while also suppressing voice. The recent steep rise in the use of restrictive clauses has shaped human capital in ways that are harmful to all workers, as well as to industries and innovation at large. Still, the burden of these restrictions is not equally distributed. By integrating economic theory and new empirical research in the field of equality and innovation, this article shows that restricting mobility and voice has negative effects on gender diversity, particularly with respect to women’s opportunities to lead, create, and invent. As a result, industries using these techniques become more concentrated, with less new entry and start-up activity and less gender parity. And because the process operates endogenously, the more an industry is concentrated, the more mobility and equality suffer. The article argues that recent findings on the gender deficit in patenting activity, intellectual property ownership, leadership, and entrepreneurship should be understood in relation to exit and voice policy infrastructure. It concludes with directions for future research and policy recommendations.