Non-Compete Covenants: Incentives to Innovate or Impediments to Growth
36 Pages Posted: 29 May 2009 Last revised: 22 Dec 2013
Date Written: 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.
Keywords: Venture capital, ﬁnancial intermediaries, legal institutions, entry, employment, innovation, wages
JEL Classification: G24, K31, L26, O43, R11
Suggested Citation: Suggested Citation