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Enforcing Covenants Not To Compete: The Life-Cycle Impact On New Firms

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  • Evan Starr
  • Natarajan Balasubramanian
  • Mariko Sakakibara

Abstract

We examine the impact of enforcing non-compete covenants (CNC) on the formation and performance of new firms using matched employer-employee data on 30 US states. To identify the impact of CNC, we exploit the inter-state variation in CNC enforcement along with the fact that courts do not enforce such covenants between law firms and departing lawyers in any state. Using a difference-in-difference-in-difference specification with law firms and firms that are not withinindustry spinouts as the baseline, we find states with stricter CNC enforcement have fewer, but larger within-industry spinouts that are more likely to survive their nascent years, and conditional on survival, grow faster during those years. These results are consistent with CNC enforcement having a selection effect on within-industry spinouts. Particularly, with stricter enforcement, only founders with higher-quality ideas and resources choose to overcome CNC-related barriers, which reduces entry rate but increases observed short-term performance of these spinouts.

Suggested Citation

  • Evan Starr & Natarajan Balasubramanian & Mariko Sakakibara, 2014. "Enforcing Covenants Not To Compete: The Life-Cycle Impact On New Firms," Working Papers 14-27, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:14-27
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    File URL: https://www2.census.gov/ces/wp/2014/CES-WP-14-27.pdf
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    Cited by:

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    2. Argote, Linda & Fahrenkopf, Erin, 2016. "Knowledge transfer in organizations: The roles of members, tasks, tools, and networks," Organizational Behavior and Human Decision Processes, Elsevier, vol. 136(C), pages 146-159.

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    More about this item

    Keywords

    Covenants Not to Compete; Entrepreneurship; Spinouts;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • K2 - Law and Economics - - Regulation and Business Law
    • K3 - Law and Economics - - Other Substantive Areas of Law
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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