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Noncompete Covenants: Incentives to Innovate or Impediments to Growth

Author

Listed:
  • Sampsa Samila

    (Brock University, St. Catharines, Ontario L2S 3A1, Canada)

  • Olav Sorenson

    (School of Management, Yale University, New Haven, Connecticut 06520)

Abstract

We find that the enforcement of noncompete clauses significantly impedes entrepreneurship and employment growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to states that enforce noncompete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment. We address potential endogeneity in the supply of venture capital by using endowment returns as an instrumental variable. Our results point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth. This paper was accepted by Gérard P. Cachon, entrepreneurship and innovation.

Suggested Citation

  • Sampsa Samila & Olav Sorenson, 2011. "Noncompete Covenants: Incentives to Innovate or Impediments to Growth," Management Science, INFORMS, vol. 57(3), pages 425-438, March.
    • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:3:p:425-438
    DOI: 10.1287/mnsc.1100.1280
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    More about this item

    Keywords

    venture capital; financial intermediaries; legal institutions; entrepreneurship; employment; innovation; wages;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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