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Do Non-Compete Clauses Undermine Minimum Wages?

Author

Listed:
  • Thomas Kohler

    (Bonn Graduate School of Economics, briq)

  • Fabian Schmitz

    (Bonn Graduate School of Economics, ECONtribute)

Abstract

Many low-wage workers in the United States are subject to non-compete clauses, which forbid them to work for competitors. Empirical research has found a link between the prevalence of non-compete clauses and minimum wage legislation. To explain this link, we propose a moral hazard model with minimum wages. Non-compete clauses can be used to punish failure. We characterize the optimal contracts with and without the possibility to use a non-compete clause. We find that the principal only uses a non-compete clause if minimum wages are suciently high. Non-compete clauses transfer utility from the agent to the principal because they increase the equilibrium effort without increasing the wages. If non-compete clauses can be arbitrarily severe, there is no minimum wage for which the agent gets a rent. If non-compete clauses are bounded, both the principal and the agent might be made better off than without non-compete clauses.

Suggested Citation

  • Thomas Kohler & Fabian Schmitz, 2020. "Do Non-Compete Clauses Undermine Minimum Wages?," ECONtribute Discussion Papers Series 021, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:021
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_021_2020.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    non-compete clause; minimum wage; limited liability; moral hazard; rent extraction;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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