Buying Loyalty: Theory and Evidence from Physicians

55 Pages Posted: 20 May 2014

See all articles by Kurt Lavetti

Kurt Lavetti

Ohio State University

Carol J. Simon

The Lewin Group

William White

Cornell University

Date Written: February 1, 2014


Skilled-services firms often lack full control over their key assets -- the relationships between their workers and clients. This problem can lead to investment holdups that distort labor market equilibria. We study how non-compete agreements (NCAs), which prohibit a worker from leaving a firm and then competing against it, can overcome this control problem. We show theoretically that NCAs reduce investment holdups and increase productive efficiency. These direct effects lead to higher worker earnings, larger returns to tenure, and longer job spells. However, NCAs also reduce the ex post bargaining power of workers, which can alter the structure of contracts. Using new survey data from physicians, we find that physicians with NCAs have contracts with output incentives that are more than twice as strong, they are over 40% more productive, earn 14% higher wages, and have within-job earnings growth that is 21 percentage points higher, despite being of the same average quality as physicians without NCAs. Decomposing earnings growth, we find that NCAs increase returns to both tenure and experience, suggesting that they promote general as well as firm-specific human capital investment. All of the effects increase in magnitude with the enforceability of state NCA laws.

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

JEL Classification: J60, J30, K31

Suggested Citation

Lavetti, Kurt and Simon, Carol J. and White, William, Buying Loyalty: Theory and Evidence from Physicians (February 1, 2014). Available at SSRN: or

Kurt Lavetti (Contact Author)

Ohio State University ( email )

410 Arps Hall
1945 North High Street
Columbus, OH 43210
United States

Carol J. Simon

The Lewin Group ( email )

3130 Fairview Park Drive, Suite 800
Suite 800
Falls Church, VA 22042
United States

William White

Cornell University ( email )

120 Martha Van Rensselaer Hall
Ithaca, NY 14853
United States

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