The costs and benefits of noncompete agreements
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Noncompete agreements are elements of workers' contracts that limit the worker's job mobility in the event of a job separation. In this dissertation, I address two major questions: first, why are noncompete agreements used, especially among workers earning low wages? Second, what are the ramifications of use of noncompete agreements, both for the firms using them and for the markets in which those firms exist? In the first chapter, co-authored with Matthew Johnson, I show that low wage workers sign noncompete agreements when their wages are constrained. I use a novel sample of owners of hair salons to empirically demonstrate that, when wage constraints are more binding due to a greater minimum wage or a greater labor supply, noncompete agreements are used more frequently. I show that use in this context may not maximize the firm's joint surplus, suggesting that policy interventions may be welfare-enhancing. In the second chapter, I generalize the theory of the first chapter, allowing for intertemporal changes in labor markets. I posit the existence of noncompete agreement cycles, which may explain recent trends in use among low wage employees. In a noncompete agreement cycle, workers who separate must exit the labor market. Low labor supply decreases use of noncompete agreements, allowing labor supply to increase and leading to use of noncompete agreements once again. I examine the costs and benefits of a policy prohibiting NCAs, analyzing such a policy's sensitivity to various parameters. In the final chapter, I consider the effects of noncompete agreements on the effort exertion of workers. If a worker is able to exert effort in order to increase the value of an asset, that worker may wish to spin off a new firm to leverage its value. The worker's current employer faces a tradeoff: a noncompete agreement induces the employee to stay but decreases the employee's incentive to exert effort. I show that, when the value of a spinoff is unknown ex ante, noncompete agreements may cause large ex post efficiency losses by limiting creation of highly profitable spinoffs.