Experimental Approach to Effective Implementation of Non-Compete Agreements
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Date
2015-08
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Publisher
The Ohio State University
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, a laboratory experiment was
designed and conducted. 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 NCA requirements in the job offer. Under the prohibition of NCAs, the workers engaged in
opportunistic behaviors and frequently changed employers in pursuit of better compensation.
Consequently, the firms faced significant turnover costs. On the contrary, when NCAs were imposed on
the workers without prior disclosure, firms tended to use unnecessary NCAs. In result, the workers
suffered from decreased economic return. Mandatory ex-ante disclosure of NCA requirements overcame
the shortcomings of the two extreme NCA policies: it provided the firms with the means to mitigate the
investment risk while allowing the potential employees to impel firms to use NCAs only when necessary.
If the NCA policy has comparable effects on the matching and separating decisions of workers and firms
in the real world, the optimal NCA usage can be achieved through self-correcting markets. Mandatory
ex-ante disclosure of NCA requirements is a potential solution to the struggles faced by states of
maintaining and enforcing convoluted statutes regarding NCAs. It can also save significant amounts of
time and money currently lost in litigation.
Description
Denman Undergraduate Research Forum Social and Behavioral Sciences: 3rd Place
Keywords
Non-Compete Agreements, Experimental Economics, Labor Economics, Public Policy