The negative effects of non-competes

Non-compete clauses appear to be increasingly common in employment contracts. A growing body of research shows that enforcement of non-compete clauses is detrimental not only to individuals, but also leads to lower employee motivation, less innovation, lower productivity, lesser economic growth and fewer companies being founded.

  • Liquidity Events and the Geographic Distribution of Entrepreneurial Activity
    • Sage Journals, Vol 48, Issue 2, 2003
    • Enforcement of non-compete clauses limits the founding rate of new companies.
    • We explore whether relatively small spatial units (metropolitan statistical areas) in close geographic proximity to firms that recently have been acquired or experienced an IPO exhibit high new venture creation rates and whether the magnitudes of these effects depend on regional differences in statutes governing the freedom of employees to move between employers. Count models of biotechnology firm foundings establish three findings: (1) IPOs of organizations located contiguous to or within an MSA accelerate the founding rate within that MSA, (2) acquisitions of biotech firms situated near to or within an MSA accelerate the founding rate within the MSA, but only when the acquirer enters from outside of the biotech industry, and (3) the enforceability of post-employment non-compete covenants, which is determined at the state level, strongly moderates these effects.
  • Noncompete Covenants: Incentives to Innovate or Impediments to Growth
    • Management science, Volume 57, Issue 3, 2011
    • We find that the enforcement of noncompete clauses significantly impedes entrepreneurship and employment growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to states that enforce noncompete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment.
  • The Firm Strikes Back: Non-compete Agreements and the Mobility of Technical Professionals
    • Sage Journals, Vol 76, Issue 5, 2011
    • In-depth interviews with 52 randomly sampled patent holders in a single industry, coupled with a survey of 1,029 engineers across a variety of industries, reveal that ex-employees subject to non-competes are more likely to take career detours—that is, they involuntarily leave their technical field to avoid a potential lawsuit
  • A study on how geography affects university knowledge spillovers
    • MIT Press Journals, Review of Economics and Statistics, Volume 95, Issue 3, 2013
    • …in states with strong noncompete labor laws, greater reliance on in-state educated scientists, and lower rates of interstate scientific labor mobility
  • How Noncompetes Stifle Performance
    • Harvard Business Review, 2014
    • A growing body of evidence shows that innovation, productivity, and economic growth are all greater in regions where local laws don’t allow (or authorities don’t enforce) such contracts—most notably, Silicon Valley.
    • In a large-scale experiment, we found that subjects in simulated noncompete conditions showed significantly less motivation and got worse results on effort-based tasks.
  • Stop Trying to Control How Ex-Employees Use Their Knowledge
    • Harvard Business Review, 2014
    • States that continue to side with controlling firms over skilled employees are hampering their economic prospects and inviting brain drain to more enlightened locales.
    • Although it might seem that greater control and stronger enforcement are beneficial—it is important for firms to protect key trade secrets, after all—the evidence shows that these changes critically undermine employee incentives to learn and innovate.
    • In California, for example, employee noncompete agreements are generally not enforced and trade secret enforcement is relatively narrow. Economics research shows that these policies are a key reason why Silicon Valley startup firms succeed relative to tech companies in many other states.
    • Evidence shows aggressive enforcement leads to less learning, a loss of talented people, and less innovation in the long run. Stronger enforcement of noncompete agreements and trade secret law also result in lower pay and reduced employee mobility.
  • Petition for Rulemaking to Prohibit Worker Non-Compete Clauses
    • Open Markets Institute, 2019
    • In section B. Effects of Reduced Job Mobility (page 32): By impairing labor market mobility and binding workers to their present employer, non-compete clauses inflict material harms on workers. Empirical studies have found that stronger enforcement of non-compete clauses is associated with lower wages and lower wage growth over time. Research has also found that stronger enforcement depresses the formation of new businesses. The adverse effects of non-competes likely extend beyond quantifiable measures such as wage levels, wage growth, and new firm creation.
  • The Case against Non-Compete Agreements
    • Utrecht University School of Economics (U.S.E.), working Paper series, volume 19, issue 20, 2019 (working paper)
    • This paper reviews the empirical evidence on the economic effects of non-compete agreements [..] The review shows that noncompetes are a significant constraint on labour mobility. This serves the interest of incumbent firms, but constrains the founding and growth of new innovative firms. These new innovative firms develop and diffuse new knowledge that challenge the position of incumbents. The net macroeconomic effect is likely to be negative when dynamic efficiency is severely harmed due to the microeconomic constraints on labour market mobility.