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

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  • Kräkel, Matthias
  • Sliwka, Dirk

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 con- tract 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," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 99, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:99
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    File URL: https://epub.ub.uni-muenchen.de/13452/1/99.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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

    fine; incentives; incomplete contracts; non-compete agreements; option contract;
    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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