72 Pages Posted: 21 Jun 2011 Last revised: 9 Aug 2011
Date Written: June 20, 2011
Several states including California restrict the ability of employers and employees to agree to post-employment covenants not to compete. Economic theory generally disfavors such restrictions, which may serve to protect various employer investments, However a number of observers have argued that such restrictions have served to create a climate of innovation in California. This paper examines this claim, arguing that most industries benefit from allowing covenants but there are positive effects to barring covenants in a select few industries where small firms innovate. In a federal system, the efficient legal regime is to have most states allow covenants and a few states restrict them. A clientele effect draws industries where small firms innovate to states that bar non-competes. Preliminary data analysis supports this view of the distribution of industries within the United States.
Keywords: non-competes, innovation
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