Start-Ups

Non-Compete Covenants: Incentives To Innovate Or Impediments To Growth

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Executive Summary

The authors find that the enforcement of non-compete clauses significantly impedes entrepreneurship and employment growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, the results indicate that, relative to states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on the number of patents, the number of firm starts, and employment. The authors address potential endogeneity issues in the supply of venture capital by using endowment returns as an instrumental variable. The results point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth.

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