Noncompete Agreements and Bargaining Power

Noncompete agreements (NCs) present a trade-off between firm investment incentives and allocative efficiency. We illustrate this trade-off using a contract choice model in which NCs encourage industry-specific investments and wages are determined by bargaining. When worker bargaining power is sufficiently high, the NC and no-NC contracts are identical, as neither contract yields firm-provided investments. When firms have all the bargaining power, NCs encourage industry-specific investments but lower wage growth. Empirically, the wage gains from NCs are driven by nonnegotiators, aligning with our model's interpretation that NCs encourage firms to provide transferable skills when they have substantial bargaining power.