Innovation through Inventor Mobility: Evidence from Non-Compete Agreements

Abstract

Proponents of restrictions on labor mobility argue that they provide innovation incentives to firms that outweigh negative worker outcomes like suppressed wages. Yet the causal effect of such policies on innovation is an open empirical question. Leveraging plausibly exogenous state-level changes in the enforceability of non-compete agreements, we find a significant negative effect on innovation: a 14% decrease in patenting for an average-sized increase in enforceability. This effect is even larger for the most novel and innovative patents and firms and is not simply attributable to competing explanations like patent-trade secret substitution or cross-state spillovers. Further analysis shows that these negative effects on innovation (i) cannot be explained by entry alone; and (ii) instead likely operate through reduced knowledge flows between firms when inventor moves decline and firms become more technologically isolated. Our findings suggest that labor mobility plays a crucial role in spreading knowledge across firms, with implications for a broad range of policies affecting worker movement.

Keywords: Non-Compete Agreements, Innovation, Labor Mobility, Knowledge Diffusion

JEL Classification: O31, O33, J21, E24, K31