The Enforceability of Non-Compete Agreements and Different Types of Entrepreneurship: Evidence from Utah and Massachusetts

Abstract

The economic effects of non-compete agreements (NCAs) have received increasing attention from academics and policymakers. This paper investigates how NCA policies affect different types of entrepreneurship with incorporated and unincorporated businesses. We exploit policy changes as quasi-experiments in Utah in 2016 and in Massachusetts in 2018. Both states decreased the enforceability of NCAs by limiting the duration of the NCAs to one year, and in addition, Massachusetts banned non-compete agreements for low-wage workers. We estimate the effects of the reforms on the probabilities of being either type of entrepreneur using Synthetic Control Methods and difference-in-differences regressions based on the American Community Survey (ACS) data. Our findings show that the decrease in the enforceability of NCAs in Massachusetts resulted in a higher rate of unincorporated entrepreneurship among low-wage workers, while there was no sizable effect on the rate of incorporated entrepreneurship. For Utah, our results indicate that the reform increased both types of entrepreneurship. The findings imply that states can promote entrepreneurial activity by reducing the enforceability of NCAs. The way of changing the enforceability of NCAs matters, as different provisions encourage different types of entrepreneurship in a given state.

Keywords: Entrepreneurship, Non-Compete Agreements, Incorporated business, Unincorporated business, Low-wage workers

JEL Classification: L26, O38, J23