Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Matthias Kräkel and Dirk Sliwka

No 4/2006, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that if the agent faces limited liability and there is an incentive problem the principal prefers not to impose such a clause if and only if the principal's profits from entering the market are sufficiently large relative to the agent's outside option. If the principal can impose a fine on the agent for leaving the firm, she will never prefer a non-compete agreement.

Keywords: fine; incentives; incomplete contracts; non-compete agreements; option contract (search for similar items in EconPapers)
JEL-codes: D21 D86 J3 K1 M5 (search for similar items in EconPapers)
Date: 2006
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Related works:
Working Paper: Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts (2006)
Working Paper: Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:42006

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