Job Market Paper

Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Competition Contracts

This paper assesses the aggregate effect of non-competition employment contracts, agreements that exclude employees from joining competing firms for a duration of time, in the managerial labor market. These contracts encourage firm investment but restrict manager mobility. To explore this tradeoff, I develop a dynamic contracting model in which firms use non-competition to enforce buyout payment when their managers are poached, ultimately extracting rent from outside firms. Such rent extraction encourages initial employing firms to undertake more investment, as they partially capture the external payoff, but distorts manager allocation. I show that the privately-optimal contract over-extracts rent by setting an excessively long non-competition duration. Therefore, restrictions on non-competition can improve efficiency. To quantitatively evaluate the theory, I assemble a new dataset on non-competition contracts for executives in U.S. public firms. Using the contract data, I find that executives under non-competition are associated with a lower separation rate and higher firm investment. I also provide new empirical evidence consistent with non-competition reducing wage-backloading in the model. The calibrated model suggests that the optimal restriction on non-competition duration is close to banning non-competition.

Working Paper

Knowledge Creation and Diffusion with Limited Appropriation, with Hugo Hopenhayn [Slides]

Innovation is central to economic growth, but so is the diffusion of new knowledge. Such is the finding of recent papers that model the interaction between these two forces. Absent in this literature are two key elements that are the focus of this paper. First, we consider the role of frictions in matching innovators and imitators mediating the process of knowledge transmission. Secondly, while most of the recent literature has focused on the case where all surplus from knowledge transmission is captured by the recipient (e.g. pure imitation), we consider all ranges of possible shares that the innovators and recipients can appropriate and their impact on growth. In a simple one period model, we derive a Hosios condition for the optimal share when firms are ex-ante homogeneous. But we also find that as the degree of heterogeneity increases, the share of innovators must decrease to maximize growth, approaching zero for sufficiently large heterogeneity. Our calibrated dynamic model suggests that the optimal share of surplus innovators appropriate should be in the lower end, consistent with weak intellectual property rights.