Mobility Constraint Externalities

Evan Starr (), Justin Frake () and Rajshree Agarwal ()
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Evan Starr: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742
Justin Frake: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Rajshree Agarwal: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742

Organization Science, 2019, vol. 30, issue 5, 961-980

Abstract: Covenants not to compete are often included in employment agreements between firms and employees, justified by each party’s voluntary “freedom to contract.” However, noncompetes may also generate externalities for all individuals in the market, including those who have not signed such agreements. We theorize that enforceable noncompetes increase frictions in the labor market by increasing uncertainty and recruitment costs and by curtailing entrepreneurship. We find that in state-industry combinations with a higher incidence and enforceability of noncompetes, workers—including those unconstrained by noncompetes—receive relatively fewer job offers, have reduced mobility, and experience lower wages. The results offer policymakers a reason to restrict noncompetes beyond axiomatic appeals to a worker’s “freedom of contract” and highlight labor market frictions that may impact firm-level human capital strategies.

Keywords: labor market frictions; mobility constraints; externalities; noncompetes (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (13)

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