Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts

Kräkel, Matthias and Sliwka, Dirk (March 2006): Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts. SFB/TR 15 Discussion Paper No. 99

Abstract

We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent's outside option. If the principal can use an option con- tract for retaining the agent, she will never prefer a strict non-compete agreement.

• Item Type: Paper
• Keywords: fine, incentives, incomplete contracts, non-compete agreements, option contract
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B4 - Die Gestaltung von Turnieren im Rahmen der Corporate Governance
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D21, D86, J3, K1, M5
• Language: English