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Mobility Constraint Externalities

Author

Listed:
  • Evan Starr

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Justin Frake

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Rajshree Agarwal

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

Abstract

Covenants not to compete are often included in employment agreements between firms and employees, justified by each party’s voluntary “freedom to contract.” However, noncompetes may also generate externalities for all individuals in the market, including those who have not signed such agreements. We theorize that enforceable noncompetes increase frictions in the labor market by increasing uncertainty and recruitment costs and by curtailing entrepreneurship. We find that in state-industry combinations with a higher incidence and enforceability of noncompetes, workers—including those unconstrained by noncompetes—receive relatively fewer job offers, have reduced mobility, and experience lower wages. The results offer policymakers a reason to restrict noncompetes beyond axiomatic appeals to a worker’s “freedom of contract” and highlight labor market frictions that may impact firm-level human capital strategies.

Suggested Citation

  • Evan Starr & Justin Frake & Rajshree Agarwal, 2019. "Mobility Constraint Externalities," Organization Science, INFORMS, vol. 30(5), pages 961-980, September.
  • Handle: RePEc:inm:ororsc:v:30:y:2019:i:5:p:961-980
    DOI: 10.1287/orsc.2018.1252
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    5. Alan Manning, 2021. "Monopsony in Labor Markets: A Review," ILR Review, Cornell University, ILR School, vol. 74(1), pages 3-26, January.
    6. Dodini, Samuel, 2023. "The spillover effects of labor regulations on the structure of earnings and employment: Evidence from occupational licensing," Journal of Public Economics, Elsevier, vol. 225(C).
    7. Bennett, Daniel L. & Wagner, Gary & Araki, Michael, 2024. "Labor market reform as an external enabler of high-growth entrepreneurship: A multi-level institutional contingency perspective," Journal of Business Venturing, Elsevier, vol. 39(6).
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    9. Milan Miric & Hakan Ozalp & Erdem Dogukan Yilmaz, 2023. "Trade‐offs to using standardized tools: Innovation enablers or creativity constraints?," Strategic Management Journal, Wiley Blackwell, vol. 44(4), pages 909-942, April.
    10. Michael Lipsitz & Evan Starr, 2022. "Low-Wage Workers and the Enforceability of Noncompete Agreements," Management Science, INFORMS, vol. 68(1), pages 143-170, January.
    11. Saerom (Ronnie) Lee, 2022. "The myth of the flat start‐up: Reconsidering the organizational structure of start‐ups," Strategic Management Journal, Wiley Blackwell, vol. 43(1), pages 58-92, January.
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