Restrictions on Executive Mobility and Reallocation: The Aggregate Effect of Non-Compete Contracts

Liyan Shi

No 852, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper assesses the aggregate effect of non-compete employment contracts, agreements that exclude employees from joining competing firms for a duration of time, in the managerial labor market. These contracts encourage firm investment but restrict manager mobility. To explore this tradeoff, I develop a dynamic contracting model in which firms use non-compete to enforce buyout payment when their managers are poached, ultimately extracting rent from outside firms. Such rent extraction encourages initial employing firms to undertake more investment, as they partially capture the external payoff, but distorts manager allocation. The privately-optimal contract, however, over-extracts rent by setting an excessively long non-compete duration. Therefore, restrictions on non-compete can improve efficiency. To quantitatively evaluate the theory, I assemble a new dataset on non-compete contracts for executives in U.S. public firms. Using the contract data, I quantify the extent that executives under non-compete are associated with a lower separation rate and higher firm investment. I also provide new empirical evidence consistent with non-compete reducing wage-backloading in the model. The calibrated model suggests that the optimal restriction on non-compete duration is close to banning non-compete.

Date: 2019
New Economics Papers: this item is included in nep-cta and nep-dge
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Citations: View citations in EconPapers (2)

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