Hybrideseminar – Non-compete agreements, tacit knowledge and market imperfections

This paper provides evidence from a natural experiment on the importance of tacit knowledge that workers have about firms’ intangible assets for competition in product and labor markets. First, evidence is presented on product and labor market imperfections across firms in manufacturing and services industries in the Netherlands. Price-cost markups and wage markups are both shown to be positively related to intangible intensity at the  firm level. A model is developed of the processes of intangible investment and wage bargaining of heterogeneous firms that provides a mechanism relating workers’ tacit knowledge to labor market imperfections and price-cost markups at the firm level. The model also provides a role for non-compete agreements (NCAs) limiting worker mobility. Our main empirical contribution comes from using linked employer-employee panel data with information on NCAs and changes in enforceability of these agreements. In a diff- in-diff specification, the paper shows that lifting NCAs increases worker wages and worker mobility and that the effect is stronger for intangible-intensive firms. We find that NCAs affect workers across the skill distribution and across industries. The causal findings from changes in the legality of NCAs correspond with the mechanisms described in the model.