Non-compete clauses, employee effort and spin-off entrepreneurship: A laboratory experiment

Abstract

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.