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Client-Based Entrepreneurship

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  • James E. Rauch
  • Joel Watson

Abstract

Client relationships create value, which employees may try to wrest from their employers by establishing their own firms. If an employer and worker cannot contract on the output and profits of the worker’s prospective new firm, at the beginning of their relationship the employer induces 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 noncompete contracts are less enforced will attract more clients and have higher employment and output. (JEL K12, L26, R10)

Suggested Citation

  • James E. Rauch & Joel Watson, 2015. "Client-Based Entrepreneurship," Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(1), pages 30-60.
  • Handle: RePEc:oup:jleorg:v:31:y:2015:i:1:p:30-60.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewt023
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Evan Starr & Justin Frake & Rajshree Agarwal, 2019. "Mobility Constraint Externalities," Organization Science, INFORMS, vol. 30(5), pages 961-980, September.
    3. Evan Starr & Natarajan Balasubramanian & Natarajan Balasubramanian, 2018. "Screening Spinouts? How Noncompete Enforceability Affects the Creation, Growth, and Survival of New Firms," Management Science, INFORMS, vol. 64(2), pages 552-572, February.
    4. Rauch, James E., 2016. "Dynastic entrepreneurship, entry, and non-compete enforcement," European Economic Review, Elsevier, vol. 86(C), pages 188-201.
    5. Wickelgren, Abraham L., 2018. "A novel justification for legal restrictions on non-compete clauses," International Review of Law and Economics, Elsevier, vol. 54(C), pages 49-57.

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    More about this item

    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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