The Anticompetitive Effects of Covenants not to Compete

Covenants not to compete, which prevent workers from quitting their employer and moving to a competing employer, have ambiguous effects on welfare, according to economic theory. Noncompetes may enable employers to invest in assets by protecting those assets from expropriation by workers or competitors, but noncompetes also interfere with labor market competition. Recent research, however, suggests that the anticompetitive effects of noncompetes are greater than any benefits, and thus that the ex