The enforceability of non-compete agreements and different types of entrepreneurship: evidence from Utah and Massachusetts

Abstract

PurposeThe purpose of this paper is to expand the empirical literature on the association between non-compete agreement (NCA) enforceability and entrepreneurship by investigating how NCA policies affect different types of entrepreneurship with incorporated and unincorporated businesses.Design/methodology/approachThe authors estimate difference-in-differences regressions based on individual-level data. This allows to control for heterogeneity at the individual level. Additionally, the authors provide graphical evidence using the synthetic control method (SCM).FindingsThe authors' findings show that the decrease in the enforceability of NCAs in Massachusetts resulted in a higher rate of unincorporated entrepreneurship among low-wage workers. At the same time, there was no sizable effect on the rate of incorporated entrepreneurship. For Utah, the authors' results indicate that the reform increased both types of entrepreneurship. The findings imply that states can promote entrepreneurial activity by reducing the enforceability of NCAs. The way of changing the enforceability of NCAs matters, as different provisions encourage different types of entrepreneurship in a given state.Originality/valueThe authors contribute to the literature on NCA enforceability effects on entrepreneurship in three ways. First, the authors utilize two quasi-experiments, the NCA policy changes in Utah in 2016 and Massachusetts in 2018, limiting NCAs to one year for all workers. Second, to the authors' knowledge, this is the first individual-level analysis that separates self-employment with incorporated and unincorporated businesses as two different types of entrepreneurship to analyze potentially heterogeneous effects of NCAs. Third, this is the first study to utilize American Community Survey (ACS) data in this literature.