Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment

We study the effects of non-competition agreements by analyzing time-series and cross-sectional variation in the enforceability of these contracts across U.S. states. We find that tougher non-competition enforcement promotes executive stability. Increased enforceability also results in re-duced executive compensation and shifts its form towards greater use of salary. We further show that stricter enforcement reduces research and development spending and capital expenditures per employee. These results are consistent with a model in which enforceable non-competition con-tracts encourage firms to invest in their managers ’ human capital. On the other hand, our findings suggest that these contracts also discourage managers from investing in their own human capital and that this second effect is empirically dominant.