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

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Author Info

  • Kräkel, Matthias

    ()
    (University of Bonn)

  • Sliwka, Dirk

    ()
    (University of Cologne)

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 not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict non-compete agreement.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2054.

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Length: 29 pages
Date of creation: Mar 2006
Date of revision:
Publication status: published in: International Economic Review, 2009, 50(1), 117-141
Handle: RePEc:iza:izadps:dp2054

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

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References

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  1. Monika Schnitzer, 1994. "The Interaction of Explicit and Implicit Contracts," Discussion Paper Serie A, University of Bonn, Germany 452, University of Bonn, Germany.
  2. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(3), pages 805-851, August.
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  5. Gibbons, R. & Murphy, K.J., 1990. "Optimal Incentive Contracts In The Presence Of Career Concerns: Theory And Evidence," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 563, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Matthias Krakel, 2005. "On the Benefits of Withholding Knowledge in Organizations," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(2), pages 193-209.
  7. 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.
  8. Thomas Rønde, 2001. "Trade Secrets and Information Sharing," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 10(3), pages 391-417, 09.
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  10. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
  11. Nöldeke, Georg & Schmidt, Klaus M., 1997. "Sequential Investments and Options to Own," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1645, C.E.P.R. Discussion Papers.
  12. Hellmann, Thomas F & Perotti, Enrico C, 2006. "The Circulation of Ideas: Firms Versus Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5469, C.E.P.R. Discussion Papers.
  13. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 39-84, February.
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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," IZA Discussion Papers 5027, Institute for the Study of Labor (IZA).

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