Non-Compete Covenants: Incentives to Innovate or Impediments to Growth
NUS Business School
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
Date posted: May 29, 2009 ; Last revised: December 22, 2013
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