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Non-Compete Covenants: Incentives to Innovate or Impediments to Growth

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  • Sampsa Samila
  • Olav Sorenson

Abstract

We find that the enforcement of non-compete clauses significantly impedes entrepreneurship and employment growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment. We address potential endogeneity issues in the supply of venture capital by using endowment returns as an instrumental variable. Our results point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth.

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Bibliographic Info

Paper provided by DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies in its series DRUID Working Papers with number 10-02.

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Date of creation: 2010
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Handle: RePEc:aal:abbswp:10-02

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Cited by:
  1. Ejsing, Ann-Kathrine & Kaiser, Ulrich & Kongsted, Hans Christian & Laursen, Keld, 2013. "The Role of University Scientist Mobility for Industrial Innovation," IZA Discussion Papers 7470, Institute for the Study of Labor (IZA).
  2. Andrew Newman & Philip Bond, 2004. "Prohibitions on Punishments in Private Contracts," Econometric Society 2004 North American Winter Meetings 143, Econometric Society.
  3. Bozkaya, Ant & Kerr, William R., 2013. "Labor regulations and European venture capital," Research Discussion Papers 30/2013, Bank of Finland.
  4. Guido Bünstorf & Christoph Engel & Sven Fischer & Werner Güth, 2013. "Win Shift Lose Stay - An Experimental Test of Non-Compete Clauses," Jena Economic Research Papers 2013-038, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  5. Ulrich Kaiser & Hans Christian Kongsted & Thomas Ronde, 2013. " Does the Mobility of R & D Labor Increase Innovation?," Working Papers 336, University of Zurich, Department of Business Administration (IBW).
  6. Matt Marx & Lee Fleming, 2012. "Non-compete Agreements: Barriers to Entry…and Exit?," NBER Chapters, in: Innovation Policy and the Economy, Volume 12, pages 39-64 National Bureau of Economic Research, Inc.

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