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

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  • Guido Bünstorf

    ()
    (University of Kassel)

  • Christoph Engel

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Sven Fischer

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Werner Güth

    ()
    (Max Planck Institute of Economics, Strategic Interaction Group, Jena)

Abstract

We experimentally test the effect of enforceable non-compete clauses on working efforts. The employee can invest into the probability of making a profitable innovation. After a successful innovation (Win) the employee may want to leave the firm (Shift) whereas after an innovation failure (Lose) he may remain (Stay) . In the treatments with non-compete clause, but not in the baseline, the employer can prevent successful innovators from leaving the firm. With standard preferences, effort should be lower if the worker cannot leave the firm, except if compulsory compensation for having to stay is very high. By contrast we find no reduction in effort even if compensation is low. Employers anticipate the incentive problem and pay a higher wage which employees reciprocate by higher effort.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2013-038.

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Date of creation: 20 Sep 2013
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Handle: RePEc:jrp:jrpwrp:2013-038

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Keywords: labor relations; non compete clause; non compete covenant; reciprocity; fairness;

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  1. Matthias Kräkel & Dirk Sliwka, 2009. "Should You Allow Your Employee To Become Your Competitor? On Noncompete Agreements In Employment Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 117-141, 02.
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  3. Mark J. Garmaise, 2011. "Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 27(2), pages 376-425.
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  9. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May.
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  11. Charness, Gary, 2000. "Self-Serving Cheap Talk: A Test Of Aumann's Conjecture," Games and Economic Behavior, Elsevier, vol. 33(2), pages 177-194, November.
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  13. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, 07.
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