Strategic Restraint: When do Human-Capital-Intensive Companies Choose (Not) to Use Noncompete Agreements?

Abstract

Extant work in strategic management has focused on the role of noncompete agreements (NCAs) – a form of restrictive legal lever used by firms when managing human capital – and conceptualized them as being advantageous to firms. Challenging this notion, we highlight a novel downside of using NCAs and show how their use by some firms creates differentiation opportunities for rival firms. We analyze a unique survey dataset to examine the heterogeneity in the firms’ actual use of NCAs conditional on industry and state. We find that the nonuse of NCAs is more common among firms that rely more heavily on talent and are also not the industry leaders, and such firms are more likely not to use NCAs with the goal of attracting skilled employees.

Keywords: Strategic management of human capital, noncompete agreements, restrictive legal practices, employee mobility, knowledge spillovers.

JEL Classification: D21, D29, D83, M1, M2