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Macroeconomics Seminar: Constrain the Constraints: The Macro Gains from Restricting Non-Compete Contracts

Dates:
  • Fri 20 Sep 2019 11.00 - 12.15
  Add to Calendar 2019-09-20 11:00 2019-09-20 12:15 Europe/Paris Macroeconomics Seminar: Constrain the Constraints: The Macro Gains from Restricting Non-Compete Contracts

This paper assesses the macro effect of non-compete employment contracts, agreements that restrict employees from joining competing firms. I develop an on-the-job search model, embedding dynamic wage contracts with non-compete clauses, to explore the tradeoff that non-competes encourage firm investment but restrict worker mobility. In the model, incumbent firms use non-compete to enforce buyout payments when workers depart, ultimately extracting rent from future employers. However, incumbents over-extract rents with excessively long non-compete duration; therefore restrictions on non-competes can improve efficiency. I quantitatively evaluate the model in the context of managerial labor market, using a novel dataset on non-compete contracts for executives in U.S. public-listed firms. Empirical evidence confirms the model mechanism and points to sizable distortion in mobility. The model suggests that qualitatively the optimal restriction on non-compete duration is close to a ban.

Seminar Room - Villa La Fonte DD/MM/YYYY
  Seminar Room - Villa La Fonte

This paper assesses the macro effect of non-compete employment contracts, agreements that restrict employees from joining competing firms. I develop an on-the-job search model, embedding dynamic wage contracts with non-compete clauses, to explore the tradeoff that non-competes encourage firm investment but restrict worker mobility. In the model, incumbent firms use non-compete to enforce buyout payments when workers depart, ultimately extracting rent from future employers. However, incumbents over-extract rents with excessively long non-compete duration; therefore restrictions on non-competes can improve efficiency. I quantitatively evaluate the model in the context of managerial labor market, using a novel dataset on non-compete contracts for executives in U.S. public-listed firms. Empirical evidence confirms the model mechanism and points to sizable distortion in mobility. The model suggests that qualitatively the optimal restriction on non-compete duration is close to a ban.


Location:
Seminar Room - Villa La Fonte

Affiliation:
Department of Economics

Type:
Seminar series

Speaker:
Liyan Shi (EIEF)

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