Orly Lobel,

“Innovation’s Edge: Talent Wants to be Free and Flowing”

The field of Employment IP (EIP) restrictions is a dynamic area of policy and has recently spurred heated debate. No state enforces contractual agreements to prevent post-employment mobility and competition without restriction, but while most states enforce non-compete agreements, a small but rising number of states, most notably California, void most or all such contractual agreements. This paper presents a theoretical model and empirical and experimental evidence that widespread EIP controls may have inadvertent counterproductive effects of lowering employee performance, impeding growth and innovation, and thereby preventing the rise of thriving agglomeration economies. It presents the following model and evidence for its support: The Dyadic-Dynamic Model (DDM):

Time 0 (During employment relationship):

1. EIP controls may encourage firms to invest in their managers’ human capital.

2. EIP controls may discourage employees to invest in their own human capital.

3. The absence of non-competes encourages compensation forms that are performance-based.

The Dynamic Aspect: Time 1 (Post-employment):

4. EIP controls may prevent loss of valuable employees and misappropriation of proprietary information.

5. EIP controls may reduce efficient employee-firm fit, “new blood,” entrepreneurship, social capital, network density, and positive knowledge spillovers.

6. EIP controls may lead to brain drain, with patterned flows of capital and talent from high to low control regions.

The paper is part of a work in progress examining employment, intellectual property and innovation, Innovation’s Edge (under contract with Yale UP).