Innovation and the Enforceability of Noncompete Agreements

Abstract:

Noncompete Agreements (NCAs) are a common way that firms restrict workers' mobility, potentially contributing to declining business dynamism. Analyzing state-level law changes, we find that making NCAs easier to enforce ("stricter" enforceability) leads to fewer patents, an effect that we show reflects a loss in innovation. While stricter enforceability encourages firms' R&D investment, consistent with alleviating hold-up concerns, it also limits inventors' job mobility and new business formation, slowing knowledge diffusion. Supplementary tests corroborate that the decline in mobility at least partially drives the decline in innovation. Variation in technology classes’ exposure to NCA enforceability reveals that our state-level estimates, if anything, underestimate the economywide impact of NCAs on innovation.