Over the past few years, Massachusetts has witnessed a vibrant debate about whether the state should stop the strict enforcement of non-compete agreements that employers require many employees to sign. Many entrepreneurs and venture capitalists have argued that Massachusetts is at a substantial disadvantage to California, a state that does not typically enforce non-compete agreements. A new article from Yale Insights (a publication of Yale's School of Management) examines the research on this topic. Scholars Olav Sorenson and Matthew Marx write about their work on this subject. They argue that non-compete agreements inhibit entrepreneurship and slow economic growth. Here's an excerpt:
States that enforce non-compete agreements and those that enforce them more strictly have fewer startups. Entrepreneurs usually have prior experience in the industry they enter, or in a closely related one; non-compete agreements can thus prevent them from striking out on their own. Even if they can found their own firms, these agreements hamper their ability to hire early employees. As a result, a dollar of venture capital goes further—in terms of creating more jobs and more economic growth—in states that restrict the enforcement of non-compete agreements. Some of our research indicates that venture capital creates two to three times as much economic growth in regions that do not enforce these agreements as it does in regions that do.
States that enforce non-compete agreements also suffer from a brain drain, with sought-after employees leaving states like Massachusetts, which enforce non-competes strictly, for states like California, which do not. Many of the students we teach at MIT and Yale to move to California for this very reason. The enforcement of non-compete agreements therefore imposes an economic cost on all of us. We support these reforms not so much because they might help to right some of the wrongs associated with non-competes—though they should help to do that as well—but because they would promote economic growth.