Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

29 Pages Posted: 5 Apr 2006

See all articles by Matthias Kräkel

Matthias Kräkel

University of Bonn - Economic Science Area; Institute for the Study of Labor (IZA)

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Date Written: March 2006

Abstract

We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict non-compete agreement.

Keywords: fine, incentives, incomplete contracts, non-compete agreements, option contract

JEL Classification: D21, D86, J3, K1, M5

Suggested Citation

Kräkel, Matthias and Sliwka, Dirk, Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts (March 2006). IZA Discussion Paper No. 2054. Available at SSRN: https://ssrn.com/abstract=894871

Matthias Kräkel (Contact Author)

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
BWLII
D-53113 Bonn
Germany
+49 228 73 92 11 (Phone)
+49 228 73 92 10 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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