Many new firms are started by entrepreneurs who got the idea while working for their previous employer. Sometimes employers also agree to develop their employees' ideas internally. This paper develops a multi-task incentives model to analyze optimal corporate strategies towards employee innovations. The model explains when employees become entrepreneurs (sometimes even involuntarily); when they become intrapreneurs, managing internal ventures; when they become managers of a corporate spin-off; and when they are denied all of these options. Important determinants for these choices are the allocation of intellectual property rights, and the availability of outside resources, such as venture capital.

When do Employees Become Entrepreneurs

This paper examines an economic theory of when employees become entrepreneurs. It jointly addresses the two fundamental questions of when employees generate innovations, and whether these innovations are developed as internal ventures or outside the firm. The model shows that if generating innovations distracts employees from their assigned tasks, firms may discourage innovation. Firms may reject profitable opportunities that fall outside of their core activities. If employees own the intellectual property (IP), they may leave to do a start-up. The allocation of IP rights also affects the generation of innovation. The external entrepreneurial environment is a complement to firm-internal innovation. If the external environment is particularly good, firms may embrace employee innovation and take advantage of it through spin-offs.

When Do Employees Become Entrepreneurs

Large law firms face unprecedented stress. Many have dissolved, gone bankrupt or significantly downsized in recent years. These events reflect more than just a shrinking economy: the basic business model of the large U.S. law firm is failing and needs fundamental restructuring. There are at least three prerequisites to establishing the viable large legal services firm of the future. First, the firm must own a core of durable, firm-specific property. Second, the firm must be able to secure non-lawyer financing in a variety of forms. Third, coherent legal structures must evolve that are suitable for large law firms. Big Law’s ability to meet these conditions is contingent on significant changes in the regulation of law practice. The article discusses the current stresses on Big Law, potential business models for legal services, and the forces that may usher in the introduction of these models.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1681549_code242499.pdf?abstractid=1467730&rulid=5447380&mirid=5

The Death of Big Law

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

In knowledge-driven industrial markets employee turnover is often quite high despite each firm’s interest in restricting knowledge flow resulting from employee departures. We present a dynamic contracting and matching model of the employment relationship between a firm and a worker (engineer) that provides an equilibrium explanation for high turnover. Incompleteness of the contracting relationship makes it optimal for firms to adopt open R&D environments as a recruitment inducement when labor is in relatively short supply. Such environments facilitate turnover. We examine how openness of R&D environments varies according to labor market conditions, expected quality of initial firm-employee match, legal protection of IP, and the longevity of the product cycle. These results are useful for understanding why geographic clusters often foster innovation.

Stewart E. Sterk

Papers

Restraints on Alienation of Human Capital