Enforceability of noncompetition agreements and firm innovation: does state regulation matter?

Abstract

In this study, we examine how noncompetition agreements and the mobility of human capital – a core asset of any firm – affect innovations of publicly traded firms in the United States. We find that firms in states with stricter noncompetition enforcement have fewer patent applications. We also examine patent forward citations and find that tougher enforcement of such contracts is associated with less innovative patents. Notably, we find that stronger enforcement of noncompetition agreements impedes innovation for firms facing intense industry labor mobility. High-powered, equity-based compensation positively moderates the relationship between noncompetition enforcement and innovation, but only for the quality of innovation.

Keywords:

• Noncompetition agreements
• innovation
• industry labor mobility
• long-term oriented compensation
• state regulation
• mobility of human capital

Acknowledgements

This work was supported by the Peak Discipline Construction Project of Education at East China Normal University; the Major Program of the National Natural Science Foundation of China under grant 13&ZD016; and the Program for New Century Excellent Talents by Ministry of Education of China under grant NCET-13-0207.

Notes

1. The measure is generously made available by Professor Andres Donangelo on the website (http://faculty.mccombs.utexas.edu/donangelo/).