Do Non-Compete Clauses Undermine Minimum Wages?

Thomas Kohler () and Fabian Schmitz ()
Additional contact information
Thomas Kohler: Bonn Graduate School of Economics, briq
Fabian Schmitz: Bonn Graduate School of Economics, ECONtribute

No 21, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Many low-wage workers in the United States are subject to non-compete clauses, which forbid them to work for competitors. Empirical research has found a link between the prevalence of non-compete clauses and minimum wage legislation. To explain this link, we propose a moral hazard model with minimum wages. Non-compete clauses can be used to punish failure. We characterize the optimal contracts with and without the possibility to use a non-compete clause. We find that the principal only uses a non-compete clause if minimum wages are suciently high. Non-compete clauses transfer utility from the agent to the principal because they increase the equilibrium effort without increasing the wages. If non-compete clauses can be arbitrarily severe, there is no minimum wage for which the agent gets a rent. If non-compete clauses are bounded, both the principal and the agent might be made better off than without non-compete clauses.

Keywords: non-compete clause; minimum wage; limited liability; moral hazard; rent extraction (search for similar items in EconPapers)
JEL-codes: D86 J32 J41 K31 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-08
New Economics Papers: this item is included in nep-hrm, nep-law and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_021_2020.pdf First version, 2020 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:021

Access Statistics for this paper

More papers in ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany Niebuhrstrasse 5, 53113 Bonn, Germany.
Bibliographic data for series maintained by ECONtribute Office ().