Experimental Approach to Effective Implementation of Non-Compete Agreements
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Date
2015-03-25
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Abstract
Although Non-Compete Agreements (NCAs) are widely used in employment contracts to prevent ex-employees from competing against their former employers, theoretical models and empirical studies have struggled to quantify their impact on the labor market. To study the effects of NCA enforcement policies on matching and separating decisions of firms and workers, I designed and conducted a laboratory experiment. The behaviors of economic agents and their impact on economic performance were compared under three policies: (1) firms were prohibited from using NCAs; (2) firms could impose NCAs after workers accepted a job offer and without prior disclosure; and (3) firms were required to disclose NCAs in the job offer. Under the prohibition of NCAs, workers have an incentive to engage in opportunistic behaviors: frequently change employers in pursuit of better compensation. As a result, firms face significant turnover costs. On the contrary, if NCAs can be imposed on workers without prior disclosure, firms can use NCAs as a tactic to increase their bargaining power rather than as an instrument to protect their business interests. As a result, workers suffer from decreased economic return. Mandatory ex-ante disclosure of NCA requirements is expected to overcome the shortcomings of the two extreme NCA policies: it improves the ability of potential employees to make informed decisions, and consequently, compels firms to limit the scope of NCAs to what is minimally required to protect their business interests. If a socially efficient outcome can be achieved by providing more information to workers and through self-correcting markets, states would have no need to amend or enforce convoluted NCA regulations, saving significant amounts of time and money.
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Social and Behavioral Sciences: 3rd Place (The Ohio State University Denman Undergraduate Research Forum)
Keywords
Non-compete agreements, Experimental Economics, Labor Economics, Public Policy