SHOULD YOU ALLOW YOUR EMPLOYEE TO BECOME YOUR COMPETITOR? ON NONCOMPETE AGREEMENTS IN EMPLOYMENT CONTRACTS

Matthias Kräkel and Dirk Sliwka

International Economic Review, 2009, vol. 50, issue 1, 117-141

Abstract: We discuss a principal-agent model in which the principal has the opportunity to include a noncompete 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 noncompete agreement. Copyright © (2009) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2009
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