Non-compete Agreements: Barriers to Entry…and Exit?

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This chapter describes recent research on postemployment covenants not to compete, as well as potential policy implications of such research. We propose that non-competes are an underappreciated lever for policy makers to wield in effecting entrepreneurial outcomes. We review theory and models as well as qualitative and quantitative evidence from ourselves and others, at three levels of analysis. First, how do non-competes impact individual careers? Second, why do firms adopt non-compete agreements, and how do they affect the behavior and performance of firms? Third, what do we know of the regional implications of non-competes for entrepreneurship, productivity, and other measures? We observe that non-competes are generally favorable for established firms though less so for firms that are young, small, or not yet established. These benefits to firms appear to be offset by costs to individual workers, who are often unaware of non-competes when they accept an employment offer and end up with reduced opportunities for employment or entrepreneurship going forward. At the regional level, evidence is thinner but points again to the tension between the interests of established firms and those that do not yet exist. Ultimately, policy makers’ decisions whether or not to enforce non-competes should be driven by the extent to which they want to optimize for the preservation of established firms versus individual career flexibility and the founding and growth of new start-ups.