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Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Author

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  • Kräkel, Matthias

    (University of Bonn)

  • Sliwka, Dirk

    (University of Cologne)

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 not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict non-compete agreement.

Suggested Citation

  • Kräkel, Matthias & Sliwka, Dirk, 2006. "Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts," IZA Discussion Papers 2054, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp2054
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    References listed on IDEAS

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    1. “Should You Allow Your Agent to Be Your Competitor?,” M. Kräkel & D. Sliwka (2009)
      by afinetheorem in A Fine Theorem on 2012-12-16 15:31:44

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    Cited by:

    1. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 329, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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    More about this item

    Keywords

    incomplete contracts; fine; option contract; non-compete agreements; incentives;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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 - - Personnel Economics

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