Escaping Non-Compete Agreements: The Role of Social Connections

Abstract

This paper shows that social ties propagate the effects of stricter non-compete agreement (NCA) enforcement across geographic boundaries. While existing studies emphasize negative local impacts of strengthened NCA enforcement, such as decreased labor mobility, reduced wages, and lower innovation output, we explore interstate spillover effects facilitated by inventors' social networks. Using inventor-level data and the Social Connectedness Index developed from Facebook friendship links, we demonstrate that inventors respond to tighter NCA policies by relocating to distant counties where they have strong social ties. Moreover, we find that out-of-state regions with high social proximity to inventors from states with strengthened NCA enforcement experience a 7% growth in both inventor populations and innovation output, measured by increased patent counts and citations. These spillover benefits particularly accrue to young and private firms and result in increased entrepreneurial activity, as measured by new firm formation and venture capital funding. Combined, these findings are consistent with social ties alleviating informational frictions and enhancing labor market matching efficiency. Overall, our findings highlight the importance of social ties in generating cross-regional spillovers when implementing labor mobility policies.

Keywords: Labor Mobility, Inventor Productivity, Corporate Innovation, Entrepreneurship, Regulation, Non-compete Agreements, Patents

JEL Classification: E24, G18, G32, G38, O31