IDEAS home Printed from https://ideas.repec.org/p/use/tkiwps/1920.html
   My bibliography  Save this paper

The Case against Non-Compete Agreements

Author

Listed:
  • F.C. Stam

Abstract

This paper reviews the empirical evidence on the economic effects of non-compete agreements. Non-compete agreements are supposed to be an incentive compatible mechanism to enhance employer investments in employee human capital. This micro mechanism is thought to stimulate macroeconomic performance. The review shows that noncompetes are a significant constraint on labour mobility. This serves the interest of incumbent firms, but constrains the founding and growth of new innovative firms. These new innovative firms develop and diffuse new knowledge that challenge the position of incumbents. The net macroeconomic effect is likely to be negative when dynamic efficiency is severely harmed due to the microeconomic constraints on labour market mobility. Labour market policy for a dynamic knowledge based economy should more explicitly balance the ‘traditional’ legal protection for human capital investments on the one hand against innovation resulting from employee mobility on the other hand. In this way positive spillovers can be enhanced and negative spillovers can be constrained more effectively.

Suggested Citation

  • F.C. Stam, 2019. "The Case against Non-Compete Agreements," Working Papers 19-20, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1920
    as

    Download full text from publisher

    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/394044/Rebo_USE_WP_2019_1920.pdf.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Luis Garicano & Claire Lelarge & John Van Reenen, 2016. "Firm Size Distortions and the Productivity Distribution: Evidence from France," American Economic Review, American Economic Association, vol. 106(11), pages 3439-3479, November.
    2. Jonathan Levin & Steven Tadelis, 2005. "Profit Sharing and the Role of Professional Partnerships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 131-171.
    3. Bruce Fallick & Charles A. Fleischman & James B. Rebitzer, 2006. "Job-Hopping in Silicon Valley: Some Evidence Concerning the Microfoundations of a High-Technology Cluster," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 472-481, August.
    4. William R. Kerr, 2010. "Breakthrough Inventions and Migrating Clusters of Innovation," NBER Chapters, in: Cities and Entrepreneurship, National Bureau of Economic Research, Inc.
    5. Doepke, Matthias & Zilibotti, Fabrizio, 2014. "Culture, Entrepreneurship, and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 1-48, Elsevier.
    6. Helsley, Robert W. & Strange, William C., 1990. "Matching and agglomeration economies in a system of cities," Regional Science and Urban Economics, Elsevier, vol. 20(2), pages 189-212, September.
    7. April M. Franco & Matthew F. Mitchell, 2008. "Covenants not to Compete, Labor Mobility, and Industry Dynamics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 581-606, September.
    8. Steven Klepper, 2011. "Nano-economics, spinoffs, and the wealth of regions," Small Business Economics, Springer, vol. 37(2), pages 141-154, September.
    9. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    10. Sharon Belenzon & Mark Schankerman, 2013. "Spreading the Word: Geography, Policy, and Knowledge Spillovers," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 884-903, July.
    11. Cooper, David P., 2001. "Innovation and reciprocal externalities: information transmission via job mobility," Journal of Economic Behavior & Organization, Elsevier, vol. 45(4), pages 403-425, August.
    12. Serguey Braguinsky & Lee G. Branstetter & Andre Regateiro, 2011. "The Incredible Shrinking Portuguese Firm," NBER Working Papers 17265, National Bureau of Economic Research, Inc.
    13. Bas Jacobs & Jules Theeuwes, 2005. "Innovation in the Netherlands: the Market Falters and the Government Fails," De Economist, Springer, vol. 153(1), pages 107-124, December.
    14. Filson, Darren & Gretz, Richard T., 2004. "Strategic innovation and technology adoption in an evolving industry," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 89-121, January.
    15. Magnus Henrekson & Dan Johansson & Mikael Stenkula, 2010. "Taxation, Labor Market Policy and High-Impact Entrepreneurship," Journal of Industry, Competition and Trade, Springer, vol. 10(3), pages 275-296, September.
    16. Matt Marx & Deborah Strumsky & Lee Fleming, 2009. "Mobility, Skills, and the Michigan Non-Compete Experiment," Management Science, INFORMS, vol. 55(6), pages 875-889, June.
    17. Sampsa Samila & Olav Sorenson, 2011. "Noncompete Covenants: Incentives to Innovate or Impediments to Growth," Management Science, INFORMS, vol. 57(3), pages 425-438, March.
    18. Diamond, Charles A & Simon, Curtis J, 1990. "Industrial Specialization and the Returns to Labor," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 175-201, April.
    19. Rotemberg, Julio J. & Saloner, Garth, 2000. "Competition and human capital accumulation: a theory of interregional specialization and trade," Regional Science and Urban Economics, Elsevier, vol. 30(4), pages 373-404, July.
    20. Mark J. Garmaise, 2011. "Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(2), pages 376-425.
    21. Richard B. Freeman, 2009. "Labor Regulations, Unions, and Social Protection in Developing Countries: Market distortions or Efficient Institutions?," NBER Working Papers 14789, National Bureau of Economic Research, Inc.
    22. Evan Starr & Natarajan Balasubramanian & Mariko Sakakibara, 2014. "Enforcing Covenants Not To Compete: The Life-Cycle Impact On New Firms," Working Papers 14-27, Center for Economic Studies, U.S. Census Bureau.
    23. Meccheri, Nicola, 2009. "A note on noncompetes, bargaining and training by firms," Economics Letters, Elsevier, vol. 102(3), pages 198-200, March.
    24. Marx, Matt & Singh, Jasjit & Fleming, Lee, 2015. "Regional disadvantage? Employee non-compete agreements and brain drain," Research Policy, Elsevier, vol. 44(2), pages 394-404.
    25. Michelle Beauchamp & Sandra Benson & Lara Daniel, 2014. "Why the Doctor Will NOT See You Now: The Ethics of Enforcing Covenants Not to Compete in Physician Employment Contracts," Journal of Business Ethics, Springer, vol. 119(3), pages 381-398, February.
    26. Kobeissi, Nada & Sun, Xian & Wang, Haizhi, 2010. "Managerial labor-market discipline and the characteristics of merger and acquisition transactions," Journal of Business Research, Elsevier, vol. 63(7), pages 721-728, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marx, Matt & Singh, Jasjit & Fleming, Lee, 2015. "Regional disadvantage? Employee non-compete agreements and brain drain," Research Policy, Elsevier, vol. 44(2), pages 394-404.
    2. Buenstorf, Guido & Engel, Christoph & Fischer, Sven & Gueth, Werner, 2016. "Non-compete clauses, employee effort and spin-off entrepreneurship: A laboratory experiment," Research Policy, Elsevier, vol. 45(10), pages 2113-2124.
    3. Evan Starr & Natarajan Balasubramanian & Natarajan Balasubramanian, 2018. "Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms," Management Science, INFORMS, vol. 64(2), pages 552-572, February.
    4. Lauren E. Aydinliyim, 2022. "The Case for Ethical Non-compete Agreements: Executives Versus Sandwich-Makers," Journal of Business Ethics, Springer, vol. 175(3), pages 651-668, January.
    5. William R. Kerr & Frederic Robert-Nicoud, 2020. "Tech Clusters," Journal of Economic Perspectives, American Economic Association, vol. 34(3), pages 50-76, Summer.
    6. Kaiser, Ulrich & Kongsted, Hans Christian & Rønde, Thomas, 2015. "Does the mobility of R&D labor increase innovation?," Journal of Economic Behavior & Organization, Elsevier, vol. 110(C), pages 91-105.
    7. William R. Kerr & Scott Duke Kominers, 2015. "Agglomerative Forces and Cluster Shapes," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 877-899, October.
    8. Carlino, Gerald & Kerr, William R., 2015. "Agglomeration and Innovation," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 349-404, Elsevier.
    9. Guido Bünstorf & Christoph Engel & Sven Fischer & Werner Güth, 2013. "Win Shift Lose Stay - An Experimental Test of Non-Compete Clauses," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2013_17, Max Planck Institute for Research on Collective Goods.
    10. Contigiani, Andrea & Testoni, Marco, 2023. "Geographic isolation, trade secrecy, and innovation," Research Policy, Elsevier, vol. 52(8).
    11. Kenneth A. Younge & Tony W. Tong & Lee Fleming, 2015. "How anticipated employee mobility affects acquisition likelihood: Evidence from a natural experiment," Strategic Management Journal, Wiley Blackwell, vol. 36(5), pages 686-708, May.
    12. He, Zhaozhao, 2018. "Money held for moving stars: Talent competition and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 210-234.
    13. Cristobal Cheyre & Steven Klepper & Francisco Veloso, 2015. "Spinoffs and the Mobility of U.S. Merchant Semiconductor Inventors," Management Science, INFORMS, vol. 61(3), pages 487-506, March.
    14. Suman Ghosh & Kameshwari Shankar, 2017. "Optimal Enforcement Of Noncompete Covenants," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 305-318, January.
    15. Evan Starr, 2019. "Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete," ILR Review, Cornell University, ILR School, vol. 72(4), pages 783-817, August.
    16. Daniel Aobdia, 2018. "Employee mobility, noncompete agreements, product-market competition, and company disclosure," Review of Accounting Studies, Springer, vol. 23(1), pages 296-346, March.
    17. Edward L. Glaeser & William R. Kerr, 2009. "Local Industrial Conditions and Entrepreneurship: How Much of the Spatial Distribution Can We Explain?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 623-663, September.
    18. Mueller, Clemens, 2023. "Non-Compete Agreements and Labor Allocation Across Product Markets," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277621, Verein für Socialpolitik / German Economic Association.
    19. Cici, Gjergji & Hendriock, Mario & Kempf, Alexander, 2018. "The impact of labor mobility restrictions on managerial actions: Evidence from the mutual fund industry," CFR Working Papers 18-01, University of Cologne, Centre for Financial Research (CFR).
    20. Kenneth A. Younge & Matt Marx, 2016. "The Value of Employee Retention: Evidence From a Natural Experiment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(3), pages 652-677, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:use:tkiwps:1920. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marina Muilwijk (email available below). General contact details of provider: https://edirc.repec.org/data/eiruunl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.