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Noncompete Covenants: Incentives to Innovate or Impediments to Growth

Author

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  • 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
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1280
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    References listed on IDEAS

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    Cited by:

    1. Kaiser, Ulrich & Kongsted, Hans Christian & Rønde, Thomas, 2015. "Does the mobility of R&D labor increase innovation?," Journal of Economic Behavior & Organization, Elsevier, pages 91-105.
    2. Kim, Jinyoung, 2017. "Racing against Time in Research: A Study of the 1995 U.S. Patent Law Amendment," IZA Discussion Papers 10815, Institute for the Study of Labor (IZA).
    3. Ann-Kathrine Ejsing & Ulrich Kaiser & Hans Christian Kongsted & Keld Laursen, 2013. " The Role of University Scientist Mobility for Industrial Innovation," Working Papers 332, University of Zurich, Department of Business Administration (IBW).
    4. Ant Bozkaya & William R. Kerr, 2014. "Labor Regulations and European Venture Capital," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(4), pages 776-810, December.
    5. Simeth, Markus & Mohammadi, Ali, 2017. "The impact of open innovation on employee mobility and entrepreneurship," Working Paper Series in Economics and Institutions of Innovation 449, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    6. Guido Bünstorf & Christoph Engel & Sven Fischer & Werner Güth, 2013. "Win Shift Lose Stay - An Experimental Test of Non-Compete Clauses," Jena Economic Research Papers 2013-038, Friedrich-Schiller-University Jena.
    7. Dr. Seung Hoon Jang, 2013. "The Offensive Framework of Resource Based View (RBV): Inhibiting Others from Pursuing Their Own Values," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 4(1), pages 62-69, February.
    8. Matt Marx & Lee Fleming, 2012. "Non-compete Agreements: Barriers to Entry…and Exit?," NBER Chapters,in: Innovation Policy and the Economy, Volume 12, pages 39-64 National Bureau of Economic Research, Inc.
    9. Buenstorf, Guido & Engel, Christoph & Fischer, Sven & Gueth, Werner, 2016. "Non-compete clauses, employee effort and spin-off entrepreneurship: A laboratory experiment," Research Policy, Elsevier, vol. 45(10), pages 2113-2124.
    10. Jasjit Singh & Ajay Agrawal, 2011. "Recruiting for Ideas: How Firms Exploit the Prior Inventions of New Hires," Management Science, INFORMS, pages 129-150.
    11. repec:kap:jtecht:v:42:y:2017:i:3:d:10.1007_s10961-016-9494-3 is not listed on IDEAS
    12. Natarajan Balasubramanian & Jin Woo Chang & Mariko Sakakibara & Jagadeesh Sivadasan & Evan Starr, 2017. "Locked In? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers," Working Papers 17-09, Center for Economic Studies, U.S. Census Bureau.
    13. repec:bla:ecinqu:v:55:y:2017:i:1:p:305-318 is not listed on IDEAS
    14. Aarstad Jarle, 2014. "Structural Holes and Entrepreneurial Decision Making," Entrepreneurship Research Journal, De Gruyter, vol. 4(3), pages 1-16, July.
    15. Bond, Philip & Newman, Andrew F., 2009. "Prohibitions on punishments in private contracts," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 526-540, October.
    16. Braunerhjelm, Pontus & Ding, Ding & Thulin, Per, 2017. "The Knowledge Spillover Theory of Intrapreneurship, Labour Mobility and Innovation by Firm Size," Working Paper Series in Economics and Institutions of Innovation 459, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    17. Anand, Smriti & Hasan, Iftekhar & Sharma, Priyanka & Wang, Haizhi, 2017. "Enforceability of non-complete agreements : When does state stifle productivity?," Research Discussion Papers 24/2017, Bank of Finland.
    18. Yang, Chia-Hsuan & Nugent, Rebecca & Fuchs, Erica R.H., 2016. "Gains from others’ losses: Technology trajectories and the global division of firms," Research Policy, Elsevier, vol. 45(3), pages 724-745.
    19. Castellaneta, Francesco & Conti, Raffaele & Veloso, Francisco M. & Kemeny, Carlos A., 2016. "The effect of trade secret legal protection on venture capital investments: Evidence from the inevitable disclosure doctrine," Journal of Business Venturing, Elsevier, vol. 31(5), pages 524-541.
    20. Yeganegi, Sepideh & Laplume, André O. & Dass, Parshotam & Huynh, Cam-Loi, 2016. "Where do spinouts come from? The role of technology relatedness and institutional context," Research Policy, Elsevier, vol. 45(5), pages 1103-1112.
    21. Braunerhjelm, Pontus & Ding, Ding & Thulin, Per, 2015. "Does Labour Mobility Foster Innovation? Evidence from Sweden," Working Paper Series in Economics and Institutions of Innovation 403, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    22. Francesco Bogliacino & Giuditta Prato & Daniel Nepelski, 2013. "Ownership Structure and R&D Orientation in ICT Groups," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 3(2), pages 164-178, December.

    More about this item

    Keywords

    venture capital; financial intermediaries; legal institutions; entrepreneurship; employment; innovation; wages;

    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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