Constrain the Constraints: The Macro Gains from Restricting Non-Compete Contracts [paper]
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 estimated model suggests that the optimal restriction on non-compete duration is close to a ban.
Work in Progress
Repurchase Options in the Markets for Lemons, with Saki Bigio
Knowledge Creation and Diffusion with Limited Appropriation, with Hugo Hopenhayn