Abstract
This paper analyzes the use of non-compete clauses that deter a worker from using what she has learned with the firm to start a new firm. It shows, first, that such clauses are only likely to be used when the worker is subject to liquidity constraints. Second, when the worker is sufficiently liquidity constrained, legal restrictions on the length of the non-compete clause can increase the joint welfare of the worker and the firm. The model does not, however, justify a complete ban on non-compete clauses.
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