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Non-Compete Covenants: Incentives to Innovate or Impediments to Growth

Sampsa Samila

NUS Business School

Olav Sorenson

Yale School of Management

May 28, 2009

We find that the enforcement of non-compete clauses significantly impedes entrepreneurship and regional growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to regions in states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict them has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment. We address potential endogeneity issues in the supply of venture capital by using endowment returns as an instrumental variable. Our results point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and growth.

Number of Pages in PDF File: 36

Keywords: Venture capital, financial intermediaries, legal institutions, entry, employment, innovation, wages

JEL Classification: G24, K31, L26, O43, R11

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Date posted: May 29, 2009 ; Last revised: December 22, 2013

Suggested Citation

Samila, Sampsa and Sorenson, Olav, Non-Compete Covenants: Incentives to Innovate or Impediments to Growth (May 28, 2009). Available at SSRN: http://ssrn.com/abstract=1411172 or http://dx.doi.org/10.2139/ssrn.1411172

Contact Information

Sampsa Samila (Contact Author)
NUS Business School ( email )
1 Business Link
Singapore, 117592
Olav Sorenson
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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