Do Non-Compete Clauses Undermine Minimum Wages?

Arbeitspapier

Many low-wage workers in the United States are subject to non-compete clauses, which forbid them to work for competitors. Empirical research has found a link between the prevalence of non-compete clauses and minimum wage legislation. To explain this link, we propose a moral hazard model with minimum wages. Non-compete clauses can be used to punish failure. We characterize the optimal contracts with and without the possibility to use a non-compete clause. We find that the principal only uses a non-compete clause if minimum wages are sufficiently high. Non-compete clauses transfer utility from the agent to the principal because they increase the equilibrium effort without increasing the wages. If non-compete clauses can be arbitrarily severe, there is no minimum wage for which the agent gets a rent. If non-compete clauses are bounded, both the principal and the agent might be made better off than without non-compete clauses.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 021

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions ; Labor Contracts ; Labor Law
• Subject: non-compete clause ; minimum wage ; limited liability ; moral hazard ; rent extraction

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kohler, Thomas ; Schmitz, Fabian
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/223043
• Last update: 10.03.2025, 11:44 AM CET