Abstract

We construct a measure of a firm’s exposure to local agglomeration of skilled labor—that we label LEO—and examine its effect on the firm’s employee-retention policies. We find that when LEO is high, firms grant more broad-based stock options, provide more employee-friendly work environment, and maintain financial flexibility. This relation is present only for high-skilled workers and stronger for firms investing in R&D. Our results show that firms strategically adopt policies to retain employees who face better local opportunities. Two quasi-natural experiments, the staggered adoption of the Inevitable Disclosure Doctrine and Hurricane Katrina, support a causal relation.