The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship

Abstract This paper examines how labor mobility restrictions like noncompete agreements affect firms’ investment decisions. Using matched employee-employer data from LinkedIn, I show that increases in the enforceability of noncompete agreements lead to widespread declines in employee departures, specifically in knowledge-intensive occupations. Established firms that rely more on these knowledge-intensive occupations increase their investment rate in physical capital. However, new firm entry in corresponding sectors declines. I provide evidence for different mechanisms to explain these patterns. Together, the findings show that labor frictions play an important role in investment decisions. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.