ENFORCING COVENANTS NOT TO COMPETE: THE LIFE-CYCLE IMPACT ON NEW FIRMS

Evan Starr (), Natarajan Balasubramanian and Mariko Sakakibara

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: We examine the impact of enforcing non-compete covenants (CNC) on the formation and performance of new firms using matched employer-employee data on 30 US states. To identify the impact of CNC, we exploit the inter-state variation in CNC enforcement along with the fact that courts do not enforce such covenants between law firms and departing lawyers in any state. Using a difference-in-difference-in-difference specification with law firms and firms that are not withinindustry spinouts as the baseline, we find states with stricter CNC enforcement have fewer, but larger within-industry spinouts that are more likely to survive their nascent years, and conditional on survival, grow faster during those years. These results are consistent with CNC enforcement having a selection effect on within-industry spinouts. Particularly, with stricter enforcement, only founders with higher-quality ideas and resources choose to overcome CNC-related barriers, which reduces entry rate but increases observed short-term performance of these spinouts.

Keywords: Covenants Not to Compete; Entrepreneurship; Spinouts (search for similar items in EconPapers)
JEL-codes: J6 K2 K3 L25 L26 L41 L5 M2 M5 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-06
New Economics Papers: this item is included in nep-bec, nep-com, nep-ent, nep-ind and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www2.census.gov/ces/wp/2014/CES-WP-14-27.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:14-27

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