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Noncompete Agreements

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Grand Ballroom Salon A
Hosted By: American Economic Association
  • Chair: Michael Lipsitz, Miami University

Mobility Constraint Externalities: How Noncompetes Shackle the Unconstrained

Evan Starr
,
University of Maryland
Justin Frake
,
University of Maryland
Rajshree Agarwal
,
University of Maryland

Abstract

Turnover enables optimal reassignment of workers to jobs/firms, but also represents a loss of investments in human capital and competitive advantage from a focal firm’s perspective. Noncompete clauses are often included in employment contracts to prevent such losses. We examine the externality effects of noncompetes on other workers not bound by such constraints. Our theory builds on human capital market frictions stemming from limited information and uncertainty regarding noncompete agreements, the effects of noncompetes on entrepreneurship, and vacancy chain theory. Our empirical tests rely on a unique dataset to discern among constrained and unconstrained workers. We find in state-industries with a higher incidence and enforceability of noncompetes, the unconstrained experience relatively fewer job offers, reduced mobility, lower wages, and are less satisfied in their jobs. Our paper has numerous theoretical, managerial and policy implications.

Physician Concentration and Negotiated Prices: Evidence From State Law Changes

Kurt Lavetti
,
Ohio State University
Naomi Hausman
,
Hebrew University of Jerusalem

Abstract

We study the relationship between physician market concentration and prices negotiated between physician practices and private insurers. We develop new instrumental variables for changes in concentration using state-level judicial decisions that change the enforceability of non-compete clauses in physician employment contracts. These law changes alter the organizational incentives of physicians, causing shocks to the concentration of physician markets. Using two databases containing the universe of physician establishments and firms in the US between 1996 and 2007, linked to prices negotiated with private insurance companies, we show that prices fall when physician establishments grow larger but rise when physician firms grow larger conditional on establishment concentration. Our results imply that a 100 point increase in the establishment-based Herfindahl Index (HHI) causes a 1.3% to 1.7% decline in prices, suggesting that insurers extract some efficiency gains from larger establishments. In contrast, the same change in concentration caused by physically distinct establishments negotiating jointly leads to price increases of 1.0% to 2.0%. The overall effect of a one standard deviation increase in state non-compete enforceability is a 9.6% increase in average physician prices.

Why Are Low-Wage Workers Signing Noncompete Agreements?

Michael Lipsitz
,
Miami University
Matthew S. Johnson
,
Duke University

Abstract

Noncompete agreements (NCAs), which contractually limit where an employee may work in the event of a job separation, have been recognized as tools employers use to protect nonphysical production assets and to reduce turnover. However, recent evidence that NCAs are widely and increasingly used in lower-wage jobs suggests our understanding of NCA use remains incomplete. In this paper, we show that NCAs arise when employers and employees are limited in their ability to transfer utility via the wage. Our model of the labor market predicts that, when such limitations are present, the terms of trade may dictate that NCAs are used to transfer surplus from the employee to the employer, even when NCAs reduce the pair's joint surplus. We find support for our model's predictions using a new survey of owners of independent hair salons, an industry in which NCAs are widely used. We find that declines in two distinct measures of the terms of trade for employees, and decreases in transferability of utility (measured by the state minimum wage) are associated with increases in NCA use. Furthermore, we generate a test for identifying when NCAs do not maximize a firm's surplus, and we identify a subset of firms in our sample, characterized by limited access to credit, for which this is the case.

The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Jessica Jeffers
,
University of Chicago

Abstract

I investigate the impact of restricting labor mobility on two components of growth: entrepreneurship and capital investment. To identify the mechanism, I combine LinkedIn’s database of employment histories with staggered changes in the enforceability of non-compete agreements that come mostly from state supreme court rulings. Stronger enforceability leads to a substantial decline in employee departures, especially in knowledge-intensive occupations, and reduces entrepreneurship in corresponding sectors. However, these shocks increase the investment rate at existing knowledge-intensive firms. The estimates in my sample suggest that, in such sectors, there is roughly $2 million of additional capital investment from publicly-held firms for every lost new firm entry.
Discussant(s)
Elena Simintzi
,
University of British Columbia
Ashley Swanson
,
University of Pennsylvania
David Powell
,
RAND
Orley Ashenfelter
,
Princeton University
JEL Classifications
  • J3 - Wages, Compensation, and Labor Costs
  • K3 - Other Substantive Areas of Law