Working Paper: CEPR ID: DP3615
Authors: Massimo Motta; Thomas Roende
Abstract: We show that when the researcher?s (observable but not contractible) contribution to innovation is crucial, a covenant not to compete (CNC) reduces effort and profits under both spot and relational contracts. Having no CNC allows the researcher to leave for a rival. This alleviates a commitment problem by forcing the firm to reward a successful researcher. However, if the firm?s R&D investment mainly matters, including a CNC in the contract is optimal, as it ensures the firm?s incentives to invest.
Keywords: innovation; intellectual property rights; labour contracts; poaching; relational contracts; startups
JEL Codes: J30; K20; L14; O31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of CNC (L61) | increased employee effort (M54) |
| absence of CNC (L61) | increased innovation (O35) |
| inclusion of CNC (L64) | decreased employee effort (J22) |
| inclusion of CNC (L64) | decreased innovation (O39) |
| strong trade secret laws (L49) | similar protective outcomes as CNCs (C34) |