Working Paper: NBER ID: w31487
Authors: Matthew S. Johnson; Michael Lipsitz; Alison Pei
Abstract: Worker mobility across firms can enhance innovation by spreading knowledge, but such mobility may also hinder innovation by making firms reluctant to invest in R&D. A common way that firms limit workers' mobility is with noncompete agreements (NCAs). We examine how the legal enforceability of NCAs affects innovation, as measured by patenting, using data on every state-level NCA enforceability change between 1991–2014. We find that making NCAs easier to enforce (“stricter” enforceability) substantially reduces the rate of patenting: an average-sized increase in NCA enforceability leads a state to have 16-19% fewer citation-weighted patents over the following 10 years. This effect reflects a true loss in innovation rather than a reduction in useless or strategic patents. We then reconcile these findings with contrasting theoretical predictions. Stricter NCA enforceability reduces job mobility and new business formation in innovative industries, suggesting slower knowledge spread. Within publicly-traded firms, stricter NCA enforceability increases investment, but still leads to less innovation, suggesting that any gains from enhanced incentives to invest are more than offset by other ways that NCAs slow down innovation. Finally, using variation in technology classes’ exposure to NCA enforceability changes, we show that the economy-wide losses to innovation from strict enforceability are even larger than what our state-level estimates imply.
Keywords: No keywords provided
JEL Codes: J38; O31; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in patenting rates (O39) | Loss in innovation (O39) |
| Stricter enforceability of NCAs (L49) | Reduced job mobility (J62) |
| Reduced job mobility (J62) | Hindered flow of knowledge (O36) |
| Stricter enforceability of NCAs (L49) | Reduction in new business formation (L26) |
| Stricter enforceability of NCAs (L49) | Increased investment in R&D (O39) |
| Increased investment in R&D (O39) | Overall decline in patenting (O38) |
| Stricter enforceability of NCAs (L49) | Economy-wide innovation impacts (O49) |
| Stricter enforceability of NCAs (L49) | Reduction in patenting rates (O39) |