Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Matthias Kräkel and Dirk Sliwka

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We discuss a principal-agent model in which the principal has the opportunity to include a non-compete 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 con- tract for retaining the agent, she will never prefer a strict non-compete agreement.

Keywords: fine; incentives; incomplete contracts; non-compete agreements; option contract (search for similar items in EconPapers)
JEL-codes: D21 D86 J3 K1 M5 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts (2006)
Working Paper: Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts (2006)
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