As typically unobserved features of the employment relationship, the role that covenants not to compete play in shaping economic dynamics is intrinsically difficult to grasp. Using nationally representative survey data on 11,505 labor force participants, we characterize the use of noncompetes by employer and employee characteristics and document the labor market effects with which they are associated. We find that noncompetes are more likely to be found in high skill, high paying occupations, but that they are also prevalent in low skill, low paying occupations. We document that negotiation over noncompetes is rare and that firms regularly delay the offering of the noncompete until after the employee has accepted the job. In the cross-section, noncompetes are associated with both increased retention and redirection from competitors, as well as a greater likelihood of receiving training and higher wages. We find little role for the enforceability of the noncompete both in determining where noncompetes are used and the strength of the relationship between a noncompete and labor market outcomes.

/pdf/noncompetes-in-the-u-s-labor-force-1i2piq16j7.pdf

Noncompetes in the U.S. Labor Force

Using data from the Survey of Income and Program Participation, the author examines the effect of noncompete enforceability on employee training and wages. An increase from no enforcement of noncom...

Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete:

Covenants not to compete (CNCs) are used in employment contracts to prevent an employee from working for other employers, and in so doing pro- tect the firm's investment in human capital. We analyze the motives for including a CNC in employment contracts using an incomplete contracts perspective. We allow for both ecient and inecient breach, and compare covenants not to com- pete with the alternative breach remedies of specific performance and liquidated damages. We conclude that CNCs may be preferable to specific performance and liquidated damages when renegotiation of the contract is not possible, and thus eciency-minded courts should enforce CNCs. With renegotiation, a CNC can lead to both first-best performance and investment, but the eciency of the con- tract will depend on the scope of the CNC, namely how limiting it is in terms of restricting employment. A CNC with too broad a scope will be inecient by allowing a firm to extract quasi-rents from other firms, thus overcompensating the employer for investment. A CNC with too narrow a scope may not allow the em- ployer to appropriately recover his investment in human capital. We argue that courts need to deter parties from agreeing to covenants that are too broad, but also to recognize the eciency of CNCs, in particular when employees are capital constrained and judgment proof.

/pdf/investing-in-human-capital-the-efficiency-of-covenants-not-1o1bknkew8.pdf

Investing in human capital: the efficiency of covenants not to compete

We study the economics of employment relationships in large law firms. Our point of departure is the “property‐rights” approach that emphasizes the centrality of ownership’s legal rights to control significant nonhuman assets of the enterprise. From this perspective, law firms are an interesting object of study because the key asset in these firms is knowledge, particularly knowledge of the needs and interests of clients. We argue that two distinctive organizational features of law firms—the use of “up‐or‐out” promotion contests and the practice of having winners become residual claimants in the firm—emerge naturally in this setting.

/pdf/when-knowledge-is-an-asset-explaining-the-organizational-5gb4212abv.pdf

When Knowledge Is an Asset: Explaining the Organizational Structure of Large Law Firms

Covenants not to compete are often included in employment agreements between firms and employees, justified by each party’s voluntary “freedom to contract” However, noncompetes may also generate e

Mobility Constraint Externalities

( When hiring an employee who will have access to confidential business information, employers often include in the employment contract a provision restricting the employee's rights to use or disclose confidential information upon termination of employment (\"post-employment restraint agreements\"). Although an employee is in any case under an implied legal obligation not to disclose valuable business secrets,1 express agreements are used to put the employee on notice both as to the existence of the obligation 2 and as to what information the employer considers confidential.' Under

/pdf/post-employment-restraint-agreements-a-reassessment-wtgwly61ch.pdf

Maureen B. Callahan

Papers

Post-Employment Restraint Agreements: A Reassessment