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Journal of Law, Economics, and Organization Advance Access published online on November 3, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewp033
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© The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

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

Mark J. Garmaise*

UCLA Anderson

* UCLA Anderson School of Management, 100 Westwood Plaza, Los Angeles, CA 90095, USA. Email: mark.garmaise{at}anderson.ucla.edu

We study the effects of noncompetition agreements by analyzing time-series and cross-sectional variation in the enforceability of these contracts across US states. We find that tougher noncompetition enforcement promotes executive stability. Increased enforceability also results in reduced executive compensation and shifts its form toward greater use of salary. We further show that stricter enforcement reduces capital expenditures per employee. These results are consistent with a model in which enforceable noncompetition contracts 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. (JEL D86, G31, J33, J62, K12)


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