Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement
We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Without finance constraints, enforcement of non-compete agreements unambiguously improves social welfare outcomes, and even increases the rate of spinoffs from original firms. Indeed, if employers have all the bargaining power vis-à-vis their employees, optimal entry of original firms and all subsequent employee spinoffs is achieved, despite the fact that the original firm can only negotiate with the first spinoff. However, if employees are unable to buy out their non-compete contracts, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of finance constraints.
My thanks to Ayal Chen-Zion and Lindsay Rickey for outstanding research assistance and to Joel Watson for many helpful discussions. I am responsible for any errors. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
James E. Rauch, 2015. "Dynastic entrepreneurship, entry, and non-compete enforcement," European Economic Review, . citation courtesy of