Dynastic entrepreneurship, entry, and non-compete enforcement

James Rauch

European Economic Review, 2016, vol. 86, issue C, 188-201

Abstract: We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Contracting failures, caused by non-verifiability of profits from new activities in original firms and overall profits from subsequent entrants, may lead respectively to implementation of new employee ideas in spinoffs and constraints on borrowing to buy out non-compete agreements. If borrowing constraints are not binding, enforcement of non-compete agreements unambiguously improves social welfare outcomes, increasing the entry of both original firms and subsequent generations of spinoffs. However, if employees are unable to buy out their non-compete covenants, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of binding finance constraints.

Keywords: Entrepreneurship; Entry; Finance constraints; Non-competes; Spinoffs (search for similar items in EconPapers)
JEL-codes: K12 L26 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement (2015)
Working Paper: Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:86:y:2016:i:c:p:188-201

DOI: 10.1016/j.euroecorev.2015.12.004

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