Mobility Constraint Externalities: How Noncompetes Shackle the Unconstrained

49 Pages Posted: 29 Aug 2017 Last revised: 22 Feb 2018

Evan Starr

University of Maryland Robert H Smith School of Business

Justin Frake

University of Maryland - Robert H. Smith School of Business

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business

Date Written: February 17, 2018

Abstract

Covenants not to compete are often included in employment agreements between firms and employees, justified by each party's voluntary "freedom to contract." However, noncompetes may also generate externalities for individuals who have not signed such agreements. We theorize that enforceable noncompetes increase frictions in the labor market by increasing uncertainty and recruitment costs, and by curtailing entrepreneurship. We find that in state-industries with a higher incidence and enforceability of noncompetes, the unconstrained receive relatively fewer job offers, have reduced mobility, lower wages, and are less satisfied with their jobs. The results offer policymakers a reason to restrict noncompetes beyond axiomatic appeals to a worker's "freedom of contract" and highlight labor market frictions that may impact firm-level human capital strategies.

Keywords: Employee Mobility, Noncompetes, Job Satisfaction, Wages, Noncompetes

Suggested Citation

Starr, Evan and Frake, Justin and Agarwal, Rajshree, Mobility Constraint Externalities: How Noncompetes Shackle the Unconstrained (February 17, 2018). Available at SSRN: https://ssrn.com/abstract=3027715 or http://dx.doi.org/10.2139/ssrn.3027715

Evan Starr (Contact Author)

University of Maryland Robert H Smith School of Business ( email )

United States
(301) 405-2320 (Phone)

Justin Frake

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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