Noncompete Agreements and the Welfare of Consumers

Abstract

Employee spin-offs harm incumbent firms by increasing competition (benefiting consumers) and preventing firm owners from making beneficial investments in workers who may later spin off (harming consumers). We model noncompete agreements (NCAs) as solutions for the firm and analyze the resulting trade-off for consumers. We show that market structure and the nature of investment play large roles. Counterintuitively, increased investment benefits have the potential to harm consumers such that industries where firms value NCAs the most are those where harm is greater. Finally, we draw two analogies between NCAs and antitrust and show how those areas inform NCA policy. (JEL D42, D43, J41, K21, L26, M13, M53)