Trade Secret Laws, Labour Mobility and Innovations

Abstract

We show that when the researcher's (observable but not contractible) contribution to innovation is crucial, a covenant not to compete (CNC) reduces effort and profits under both spot and relational contracts. Having no CNC allows the researcher to leave for a rival. This alleviates a commitment problem by forcing the firm to reward a successful researcher. However, if the firm's R&D investment mainly matters, including a CNC in the contract is optimal, as it ensures the firm's incentives to invest.

Keywords: Innovation, intellectual property rights, labour contracts, poaching, relational contracts, start-ups

JEL Classification: J30, K20, L14, O31, O34