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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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse4_2006.
Length: 28 Date of creation: Mar 2006 Date of revision: Handle: RePEc:bon:bonedp:bgse4_2006
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs K1 - Law and Economics - - Basic Areas of Law M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
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