Strategic restraint: When do human-capital-intensive companies choose (not) to use noncompete agreements?

Abstract

Research Summary: Extant work in strategic management has focused on the role of noncompete agreements (NCAs)—a form of restrictive legal lever used by firms when managing human capital—and conceptualized them as being advantageous to firms. Challenging this notion, we highlight a novel downside of using NCAs and show how their use by some firms creates differentiation opportunities for rival firms. We analyze a unique survey dataset to examine the heterogeneity in the firms' actual use of NCAs conditional on industry and state. We find that the nonuse of NCAs is more common among firms that rely more heavily on talent and are also not the industry leaders, and such firms are more likely not to use NCAs with the goal of attracting skilled employees. Managerial Summary: Noncompete agreements (NCAs) have long been regarded as effective tools for firms managing human capital. Our research challenges this conventional wisdom. We show that NCAs are not uniformly beneficial to all firms even when looking at competitors within the same industry. By analyzing a unique survey dataset, we find that firms relying heavily on talent and not leading their industries are more inclined to forgo NCAs. Their strategic intent? Attracting skilled employees. This study sheds light on the delicate balance between legal constraints and talent attraction and is particularly salient in the context of the policy efforts to ban NCAs.