DP3615 Trade Secret Laws, Labour Mobility and Innovations

Author(s): Massimo Motta, Thomas Rønde
Publication Date: October 2002
Keyword(s): innovation, intellectual property rights, labour contracts, poaching, relational contracts, start-ups
JEL(s): J30, K20, L14, O31, O34
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3615

We show that when the researcher?s (observable but not contractible) contribution to innovation is crucial, a covenant not to compete (CNC) reduces effort and profits under both spot and relational contracts. Having no CNC allows the researcher to leave for a rival. This alleviates a commitment problem by forcing the firm to reward a successful researcher. However, if the firm?s R&D investment mainly matters, including a CNC in the contract is optimal, as it ensures the firm?s incentives to invest.