Non-compete clauses and productivity: New cross-country firm-level evidence

Restraint clauses that prevent workers from joining or starting a competing firm – commonly known as non-compete clauses – are traditionally justified to protect legitimate business interests. Yet, such clauses may suppress job mobility, business dynamism and competition, with adverse consequences for productivity growth. This paper presents the first harmonised cross-country evidence on the link between non-compete clauses and productivity performance. Merging novel data on industry-country-level prevalence of non-compete clauses with firm-level data from Orbis, we find that a higher non-compete prevalence is associated with weaker productivity enhancing labour-reallocation and slower knowledge diffusion. The estimates translate into meaningful aggregate productivity losses (1.9% for a 10 percentage point increase in non-compete incidence). While the economic “bite” of non-competes on productivity seems larger in countries where firms have greater freedom to deploy them, it remains negative in countries where non-competes are more tightly regulated. This underscores the idea that non-compete clause can exert “chilling effects” even when they are unlikely to be upheld by courts, raising questions about whether current regulatory frameworks are fit for purpose.