Covenants not to Compete, Labor Mobility, and Industry Dynamics

Abstract

Conventional wisdom among legal scholars is that contractual restrictions on employee mobility affect turnover and led to the overtaking of Massachusetts' Route 128 by Silicon Valley. We study a model of employee mobility in the spirit of Pakes and Nitzan to see when this can be the case. We show that, in fact, with certain frictions taken into account, a model of employee mobility can not only replicate the overtaking by Silicon Valley, but it can also help to explain Route 128s early dominance. Further, the model explains the relative success of firms that start as, or generate, spin-outs.

The knowledge spillover theory of intrapreneurship

“…12 Firms may also seek to contractually restrain the mobility of employees defined as strategically important to guard against the loss of proprietary knowledge. These measures seem to have an ambiguous effect on firm innovation and fall outside the scope of the present analysis (Fosfuri and Rønde 2004;Franco and Mitchell 2008;Marx et al 2009;Samila and Sorenson 2011). 13 Zhou et al's (2011) analysis is based on survey data and defines small firms as those having less than 250 employees, while the smallest firms (< 5 employees) are excluded.…”

Entrepreneurship, Innovation and Institutions

“…These employee noncompete agreements are intended to help firms protect their investments in human capital, intellectual property 14 and relationships: firms can increase their productivity by training their workers, by developing new products and processes, as well as by building valuable relationships with customers and suppliers (see Franco and Mitchell 2008). These non-compete agreements may also reflect the vested interests of incumbents that want to restrict the possibility of employees striking out on their own, and exploiting their knowledge outside the former employer.…”

Win Shift Lose Stay An Experimental Test of Non-Compete Clauses

“…Gilson (1999) first suggested that the nonenforceability of non-compete clauses enhanced labor mobility in California, which in turn may have contributed to Silicon Valley's development into being the world's leading high-technology cluster. This conjecture has motivated subsequent studies exploring the potential trade-off between employers' incentives to invest in employees' human capital formation and positive externalities emanating from the mobility of highly skilled workers and its repercussions on industrial dynamics (Fallick et al, 2006;Franco and Mitchell, 2008). Empirical research based on field data provides substantial (albeit indirect) evidence indicating that non-compete clauses are effective constraints to employee mobility.…”