The economics of non-competes

Tyler Cowen.

"That is the topic of my latest Bloomberg column, here is one excerpt:

The value of noncompete clauses is easy to illustrate. Say you run a hedge fund. Many members of your trading team will have partial access to your firm’s trading secrets, and if they leave they can take those secrets with them. In the absence of noncompete agreements, firms would be more likely to “silo” information — becoming less efficient and less able to pay higher wages.

Nondisclosure agreements for workers in such positions are common, but they are difficult to enforce — making noncompete agreements more relevant. How exactly might you find out if some other newly created hedge fund is using your trading algorithms?

Or say you are a sales company with a customer list, or a nonprofit with a donor list. An employee who sees those lists could use that information to start a competing business, or take that information to competitors. It seems reasonable in such cases to restrict the ability of employees to “jump ship.”

If noncompetes are banned outright, to repeat, the effect will be less information-sharing within the company. New workers in particular, who have not demonstrated their long-term loyalty, will have a hard time getting access to information and getting ahead. More senior employees will have the advantage, hardly a formula for boosting economic opportunity.

I call for federalism and piecemeal regulation of the practice, not the all-out federal ban proposed by Lina Khan’s once again overreaching FTC."