Client-Based Entrepreneurship

James Rauch and Joel Watson

No 15933, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Client relationships create value, which employees may try to wrest from their employers by setting up their own firms. If when an employer and worker establish a relationship they cannot contract on the output and profits of the worker's prospective new firm, the employer counters by inducing the worker to sign a contract that prohibits him from competing or soliciting the current client in the event of termination of employment. The socially optimal level of entrepreneurship will nevertheless be achieved if clients, employers, and workers can renegotiate these restrictive employment contracts and make compensating transfers. If workers cannot finance transfers to employers, however, employers and workers will sign contracts that are too restrictive and produce too little entrepreneurship, and governments can increase welfare by limiting enforcement of these contracts. With or without liquidity constraints, locations where non-compete contracts are less enforced will attract more clients and have higher employment and output.

JEL-codes: K12 L26 R10 (search for similar items in EconPapers)
Date: 2010-04
Note: LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as James E. Rauch & Joel Watson, 2015. "Client-Based Entrepreneurship," Journal of Law, Economics and Organization, Oxford University Press, vol. 31(1), pages 30-60.

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