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Dynastic entrepreneurship, entry, and non-compete enforcement

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  • Rauch, James E.

Abstract

We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Contracting failures, caused by non-verifiability of profits from new activities in original firms and overall profits from subsequent entrants, may lead respectively to implementation of new employee ideas in spinoffs and constraints on borrowing to buy out non-compete agreements. If borrowing constraints are not binding, enforcement of non-compete agreements unambiguously improves social welfare outcomes, increasing the entry of both original firms and subsequent generations of spinoffs. However, if employees are unable to buy out their non-compete covenants, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of binding finance constraints.

Suggested Citation

  • Rauch, James E., 2016. "Dynastic entrepreneurship, entry, and non-compete enforcement," European Economic Review, Elsevier, vol. 86(C), pages 188-201.
    • Handle: RePEc:eee:eecrev:v:86:y:2016:i:c:p:188-201
    DOI: 10.1016/j.euroecorev.2015.12.004
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    Cited by:

    1. Thomas Hellmann & Veikko Thiele, 2019. "Fostering Entrepreneurship: Promoting Founding or Funding?," Management Science, INFORMS, vol. 67(6), pages 2502-2521, June.
    2. Liyan Shi, 2021. "The Macro Impact of Noncompete Contracts," EIEF Working Papers Series 2103, Einaudi Institute for Economics and Finance (EIEF), revised 2021.
    3. Liyan Shi, 2019. "Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Compete Contracts," 2019 Meeting Papers 852, Society for Economic Dynamics.

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    More about this item

    Keywords

    Entrepreneurship; Entry; Finance constraints; Non-competes; Spinoffs;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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