We experimentally test the effect of enforceable non-compete clauses on working effort and spin-off entrepreneurship. An employee invests effort in the probability of a profitable innovation. After a successful innovation the employee may want to start her own spin-off firm and compete with her prior employer. In the baseline setup without non-compete clause, spin-offs result from failed negotiation about employee compensation even though they reduce the joint payoffs of both parties. In two treatments with non-compete clause the employer can prevent successful innovators from leaving the firm. We find no significantly negative effect of non-compete clauses on employee effort, even if compensation is low.

Research Policy
Rotterdam Institute of Law and Economics

Engel, C.W, Bünstorf, G. (Guido), Fischer, S. (Sven), & Güth, W. (Werner). (2016). Non-Complete Clauses, Employee Effort and Spin-off Entrepreneurship: A Laboratory Experiment. Research Policy, 2016(45), 2113–2124. Retrieved from http://hdl.handle.net/1765/107896