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Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement

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  • James E. Rauch

Abstract

We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Without finance constraints, enforcement of non-compete agreements unambiguously improves social welfare outcomes, and even increases the rate of spinoffs from original firms. Indeed, if employers have all the bargaining power vis-à-vis their employees, optimal entry of original firms and all subsequent employee spinoffs is achieved, despite the fact that the original firm can only negotiate with the first spinoff. However, if employees are unable to buy out their non-compete contracts, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of finance constraints.

Suggested Citation

  • James E. Rauch, 2015. "Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement," CESifo Working Paper Series 5370, CESifo.
    • Handle: RePEc:ces:ceswps:_5370
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    Cited by:

    1. Liyan Shi, 2021. "The Macro Impact of Noncompete Contracts," EIEF Working Papers Series 2103, Einaudi Institute for Economics and Finance (EIEF), revised 2021.
    2. Thomas Hellmann & Veikko Thiele, 2019. "Fostering Entrepreneurship: Promoting Founding or Funding?," Management Science, INFORMS, vol. 67(6), pages 2502-2521, June.
    3. Liyan Shi, 2019. "Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Compete Contracts," 2019 Meeting Papers 852, Society for Economic Dynamics.

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    More about this item

    Keywords

    entrepreneurship; entry; finance constraints; non-competes; overlapping generations; spinoffs;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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