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

Matthias Kräkel and Dirk Sliwka

No 2054, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict non-compete agreement.

Keywords: incomplete contracts; fine; option contract; non-compete agreements; incentives (search for similar items in EconPapers)
JEL-codes: D21 D86 J3 K1 M5 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2006-03
New Economics Papers: this item is included in nep-com and nep-law
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Published - published in: International Economic Review, 2009, 50(1), 117-141

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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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