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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
Matthias Kräkel (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 733914, fax: +49 228 739210. m.kraekel@uni-bonn.de)
Dirk Sliwka (University of Cologne, Herbert-Lewin-Str. 2, D-50931 Köln, Germany, tel: +49 221 470-5888, fax: +49 221 470-5078. dirk.sliwka@uni-koeln.de)

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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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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 99.

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Date of creation: Mar 2006
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Handle: RePEc:trf:wpaper:99

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Related research
Keywords: fine incentives incomplete contracts non-compete agreements

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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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References listed on IDEAS
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    Other versions:
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  4. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  6. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November. [Downloadable!] (restricted)
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  7. Schmidt, Klaus M. & Schnitzer, Monika, 1995. "The interaction of explicit and implicit contracts," Economics Letters, Elsevier, vol. 48(2), pages 193-199, May. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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  11. Matthias Kräkel, 2005. "On the Benefits of Withholding Knowledge in Organizations," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 12(2), pages 193-209, July. [Downloadable!] (restricted)
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