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

  • Kräkel, Matthias

    ()

    (University of Bonn)

  • Sliwka, Dirk

    ()

    (University of Cologne)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2054.

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Length: 29 pages
Date of creation: Mar 2006
Date of revision:
Publication status: published in: International Economic Review, 2009, 50(1), 117-141
Handle: RePEc:iza:izadps:dp2054
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