The Impacts of Restricting Mobility of Skilled Service Workers: Evidence from Physicians

Abstract

We study the question: why do skilled services firms use non-compete agreements (NCAs), which prohibit workers from leaving firms and competing against them? We conduct a survey of physicians linking the use of NCAs to labor market outcomes and firm performance, and show that by deterring the poaching of patients NCAs increase the rate of return to job-tenure, with larger effects in states with more enforceable NCA laws. These effects are consistent with NCAs enabling practices to allocate clients to new physicians through intra-firm patient referrals, reducing a form of investment holdup. We discuss an array of suggestive evidence supporting this as the primary explanation, although we find NCAs also provide benefits by reducing job turnover.

Keywords: Non-Compete Agreements, Human Capital, Compensation Contracts

JEL Classification: J60, J30, K31