Bundling Postemployment Restrictive Covenants: When, Why, and How It Matters
75 Pages Posted: 8 Apr 2021
Date Written: March 28, 2021
Many of a firm’s most important informational or relational resources are at risk of diffusion to its competitors because they are embedded in the firm’s human capital. Using novel firm- and worker-level data, we present descriptive evidence on the adoption of and outcomes associated with four post-employment restrictive covenants (PERCs) that limit the diffusion of such resources to competitors: non-disclosure agreements (NDA), non-solicitation agreements, non-recruitment agreements, and non-compete agreements. We find that firms tend to adopt these PERCs together, with just three combinations (no PERCs, only an NDA, all four) covering more than 82% of workers and 70% of firms. We examine two rationales for why firms might bundle PERCs together—value creation and pure value capture—and draw out and test their implications both for worker and firm outcomes and for adoption. Our results suggest that pure value capture is the likely rationale for bundling PERCs with the average worker, while value creation is more applicable to top managers. Finally, we document how studying just one PERC can be misleading when such PERCs are bundled.
Keywords: Postemployment Restrictive Covenants, Value Capture, Value Creation, Isolating Mechanisms
JEL Classification: J31, J41, J42, K31
Suggested Citation: Suggested Citation