Unconstrain the Constrained: The Macro Gains from Restricting Non-Compete Contracts


Speaker:Liyan Shi, Postdoctoral Researcher at the Einaudi Institute for Economics and Finance
Date: Friday 6 December 2019
Time: 14.00-15.30
Location: Bateman Lecture Theatre

Further details

This paper assesses the macro impact of non-compete employment contracts, considering the tradeoff between encouraging firm investment and restricting worker mobility. I develop an on-the-job search model in which firms and workers sign dynamic wage contracts with non-compete clauses. Incumbent firms use non-compete to enforce buyout payments when their workers depart, ultimately extracting rent from future entrant employers. However, the rent extraction is socially excessive and restrictions on non-compete can improve efficiency. I quantitatively evaluate the model in the managerial labor market, using a novel dataset of executive employment contracts. Empirical evidence confirms the model mechanism and points to sizable distortion in mobility. The calibrated model suggests that the optimal restriction on non-compete duration is close to a ban.