01 Feb 2007  Working Papers

Noncompetes and Inventor Mobility: Specialists, Stars, and the Michigan Experiment

Executive Summary — Two years ago, Microsoft and Google wrangled publicly when Google hired away a star Microsoft employee who had signed an agreement not to compete against Microsoft for one year after leaving the company. Managers enjoy a love/hate relationship with such "noncompete" covenants depending on whether they are gaining or losing talent. This study, which looks at Michigan's inadvertent reversal of its enforcement policy in the mid-1980s, is the first to apply longitudinal analysis to the question of noncompete enforcement. Given the importance of mobility for knowledge spillovers and entrepreneurship, the evidence has implications for day-to-day behavior, careers, business, and policy. Key concepts include:

  • "Stars"—highly cited and specialist inventors—experienced significantly less career mobility once noncompetes began to be enforced.
  • The networks of small companies so crucial to Silicon Valley's growth would be less likely to develop in regions that enforce noncompetes.
  • Policy planners must decide when the interests of incumbent firms outweigh those of individual careers and possibly regional development.

 

Author Abstract

Several scholars have documented the positive consequences of job-hopping by inventors, including knowledge spillovers and agglomeration and the concentration of spinoffs. This work investigates a possible antecedent of inventor mobility: regional variation in the enforcement of postemployment noncompete covenants. While previous research on non-competes has been largely focused on California and Silicon Valley, we exploit Michigan's inadvertent reversal of its noncompete enforcement legislation as a natural experiment to investigate the impact of noncompetes on mobility. Using the U.S. patent database and a differences-in-differences approach between inventors in states that did not enforce and did not change enforcement of non-compete laws, we find that relative mobility decreased by 34 percent in Michigan after the state reversed its policies. Moreover, this effect was amplified 14 percent for "star" inventors and 17 percent for "specialist" inventors.

Paper Information