Wednesday, June 22, 2011

Weiss: Do Noncompetes Enhance, or Stifle, Innovation?

Nca Deborah Weiss (McCombs - Business) has just posted on SSRN her article Entrepreneurial Employees.  She argues that there's not necessarily a binary answer to the question "Are noncompetes good or bad?" -- the answer is nuanced.  Here's the abstract:

Several states including California restrict the ability of employers and employees to agree to post-employment covenants not to compete. Economic theory generally disfavors such restrictions, which may serve to protect various employer investments, However a number of observers have argued that such restrictions have served to create a climate of innovation in California. This paper examines this claim, arguing that most industries benefit from allowing covenants but there are positive effects to barring covenants in a select few industries where small firms innovate. In a federal system, the efficient legal regime is to have most states allow covenants and a few states restrict them. A clientele effect draws industries where small firms innovate to states that bar non-competes. Preliminary data analysis supports this view of the distribution of industries within the United States.


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