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The Macro Impact of Noncompete Contracts

Liyan Shi
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Liyan Shi: EIEF

No 2103, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: This paper studies the macro impact of noncompete employment contracts, assessing the trade-off between restricting worker mobility and encouraging firm investment. I develop an on-the-job search model in which firms and workers sign dynamic wage contracts with noncompete clauses and _firms invest in their worker's general human capital. The incumbent employers use noncompete clauses to enforce buyout payments when their workers depart, ultimately extracting rent from future employers. The model implies that this rent extraction is socially excessive and restrictions on these clauses can improve efficiency. I quantitatively evaluate the model in the managerial labor market, using a novel dataset of executive employment contracts. I find that the optimal restriction on noncompete duration is close to a ban.

Pages: 41 pages
Date: 2021, Revised 2021
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