Noncompete Agreements and the Welfare of Consumers

Lipsitz, Michael; Tremblay, Mark J.

doi:10.1257/mic.20210426

Abstract

Employee spinoffs harm incumbent firms by increasing competition (benefiting consumers) and by 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 tradeoff for consumers. We show that market structure and the nature of investment play large roles. Counter intuitively, 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.

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Noncompete Agreements and the Welfare of Consumers

Abstract

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