Effects of non-compete agreements on innovation and teamwork

This thesis investigates the effects of non-compete agreements on teamwork and innovation. I argue that patents convey information about the productivity of inventors to the labor market. Therefore, firms have an incentive to manipulate the productivity signal revealed by patents to mitigate competition over their inventors. In particular, the firms adjust the size of teams of inventors strategically, often forming larger teams than what is efficient, before applying for a patent. Since signing non-compete agreements with inventors is an alternative way to address competition for current employees, the feasibility of such contractual clauses reduces the firms' incentives to manipulate team size. In the empirical analysis, I investigate the extent to which my prediction is consistent with the data. Specifically, I use patents issued to inventors by the United States Patent and Trademark Office (USPTO) and the reversal of a Michigan law that prevents the enforceability of non-compete agreements in 1985 to employ a difference-in-differences estimation. My results are consistent with the idea that innovative firms reduce their team size when non-compete agreements are feasible.