Noncompete Agreements and the Welfare of Consumers

43 Pages Posted: 25 Jan 2022

See all articles by Michael Lipsitz

Michael Lipsitz

Federal Trade Commission Bureau of Economics

Mark J. Tremblay

Miami University

Date Written: December 1, 2021

Abstract

Employee spinoffs may harm incumbent firm owners for two reasons: first, they increase competition in relevant product markets, potentially decreasing rents associated with market power. Second, the threat of an employee spinoff may prevent a firm owner from making costly, productivity-enhancing investments in their workers. Noncompete agreements (NCAs) solve both problems. From the perspective of a consumer, NCAs may increase prices by decreasing competition, but the investments made by firm owners have the potential to mitigate competitive harms. We develop a model which formally demonstrates this tradeoff to assess the impacts of NCA policy on consumers, and discuss when a ban on NCAs is most likely to be beneficial for consumers. We show that the competitive environment, the nature of investment pass-through, and the benefits of investment play large roles. Counterintuitively, increased benefits of costly investments have the potential to harm consumers, such that industries where NCAs are most important to firms may also be those where harm is greater. Finally, we draw two analogies between NCAs and antitrust (merger analysis and pay-for-delay agreements) and show how insights in those areas may inform NCA policy.

Keywords: Noncompete agreements, Entrepreneurship, Employee Spinoffs, Antitrust, Consumer Welfare

JEL Classification: J41, J53, K21, L26, L41

Suggested Citation

Lipsitz, Michael and Tremblay, Mark, Noncompete Agreements and the Welfare of Consumers (December 1, 2021). Available at SSRN: https://ssrn.com/abstract=3975864 or http://dx.doi.org/10.2139/ssrn.3975864

Michael Lipsitz (Contact Author)

Federal Trade Commission Bureau of Economics ( email )

600 Pennsylvania Ave NW
Washington, DC 20580
United States

Mark Tremblay

Miami University ( email )

208 Laws Hall
Oxford, OH 45056
United States

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