AbstractClient relationships create value, which employees may try to wrest from their employers by setting up their own firms. If when an employer and worker establish a relationship they cannot contract on the output and profits of the worker’s prospective new firm, the employer counters by inducing the worker to sign a contract that prohibits him from competing or soliciting the current client in the event of termination of employment. The socially optimal level of entrepreneurship will nevertheless be achieved if clients, employers, and workers can renegotiate these restrictive employment contracts and make compensating transfers. If workers cannot finance transfers to employers, however, employers and workers will sign contracts that are too restrictive and produce too little entrepreneurship, and governments can increase welfare by limiting enforcement of these contracts. With or without liquidity constraints, locations where non-compete contracts are less enforced will attract more clients and have higher employment and output.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15933.
Date of creation: Apr 2010
Date of revision:
Publication status: published as “Client-Based Entrepreneurship” (with Joel Watson), Journal of Law, Economics, and Organization, forthcoming.
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Find related papers by JEL classification:
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
- R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
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- Muendler, Marc-Andreas & Rauch, James E. & Tocoian, Oana, 2012.
"Employee spinoffs and other entrants: Stylized facts from Brazil,"
International Journal of Industrial Organization,
Elsevier, vol. 30(5), pages 447-458.
- Oana Hirakawa & Marc-Andreas Muendler & James E. Rauch, 2010. "Employee Spinoffs and Other Entrants: Stylized Facts from Brazil," NBER Working Papers 15638, National Bureau of Economic Research, Inc.
- Oana Hirakawa & Marc-Andreas Muendler & James E. Rauch, 2010. "Employee spinoffs and other entrants: stylized facts from Brazil," LSE Research Online Documents on Economics 36384, London School of Economics and Political Science, LSE Library.
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