Should You Allow Your Employee to Become Your Competitor? On Noncompete Agreements in Employment Contracts

25 Pages Posted: 29 Jan 2009

See all articles by Matthias Kräkel

Matthias Kräkel

University of Bonn - Economic Science Area; Institute for the Study of Labor (IZA)

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Abstract

We discuss a principal agent model in which the principal has the opportunity to include a noncompete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal, as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict noncompete agreement.

Suggested Citation

Kräkel, Matthias and Sliwka, Dirk, Should You Allow Your Employee to Become Your Competitor? On Noncompete Agreements in Employment Contracts. International Economic Review, Vol. 50, Issue 1, pp. 117-141, February 2009. Available at SSRN: https://ssrn.com/abstract=1333887 or http://dx.doi.org/10.1111/j.1468-2354.2008.00525.x

Matthias Kräkel (Contact Author)

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
BWLII
D-53113 Bonn
Germany
+49 228 73 92 11 (Phone)
+49 228 73 92 10 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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