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Should You Allow Your Agent to Become Your Competitor? -- On Non-Compete Agreements in Employment Contracts

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  • Matthias Kräkel
  • Dirk Sliwka

    ()

Abstract

We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that if the agent faces limited liability and there is an incentive problem the principal prefers not to impose such a clause if and only if the principal's profits from entering the market are sufficiently large relative to the agent's outside option. If the principal can impose a fine on the agent for leaving the firm, she will never prefer a non-compete agreement.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse4_2006.

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Length: 28
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bon:bonedp:bgse4_2006

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: fine; incentives; incomplete contracts; non-compete agreements;

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References

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  1. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  3. Murphy, K.J. & Gibbons, R., 1990. "Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence," Papers 90-09, Rochester, Business - Managerial Economics Research Center.
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  7. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  8. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
  9. Ariel Pakes & Shmuel Nitzan, 1982. "Optimum Contracts for Research Personnel, Research Employment, and the Establishment of "Rival" Enterprises," NBER Working Papers 0871, National Bureau of Economic Research, Inc.
  10. Hellmann, Thomas F & Perotti, Enrico C, 2006. "The Circulation of Ideas: Firms Versus Markets," CEPR Discussion Papers 5469, C.E.P.R. Discussion Papers.
  11. Nöldeke, Georg & Schmidt, Klaus M., 1998. "Sequential investments and options to own," Munich Reprints in Economics 19327, University of Munich, Department of Economics.
  12. Matthias Krakel, 2005. "On the Benefits of Withholding Knowledge in Organizations," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 12(2), pages 193-209.
  13. Thomas Rønde, 2001. "Trade Secrets and Information Sharing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(3), pages 391-417, 09.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. “Should You Allow Your Agent to Be Your Competitor?,” M. Kräkel & D. Sliwka (2009)
    by afinetheorem in A Fine Theorem on 2012-12-16 09:31:44
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Cited by:
  1. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 329, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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