Mobility Constraint Externalities

Forthcoming at Organization Science

52 Pages Posted: 29 Aug 2017 Last revised: 14 Oct 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: June 30, 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 all individuals in the market, including those 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-industry combinations with a higher incidence and enforceability of noncompetes, workers – including those unconstrained by noncompetes – receive relatively fewer job offers, have reduced mobility, and experience lower wages. 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 (June 30, 2018). Forthcoming at Organization Science. 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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