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

36 Pages Posted: 29 May 2009 Last revised: 22 Dec 2013

Sampsa Samila

University of Navarra, IESE Business School; National University of Singapore Business School

Olav Sorenson

Yale School of Management

Date Written: May 28, 2009

Abstract

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.

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

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

Suggested Citation

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

Sampsa Samila (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

National University of Singapore Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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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