DP3615 | Trade Secret Laws, Labour Mobility and Innovations

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We show that when the researcher?s (observable but not contractible) contribution to innovation is crucial, a covenant not to compete (CNC) reduces effort and profits under both spot and relational contracts. Having no CNC allows the researcher to leave for a rival. This alleviates a commitment problem by forcing the firm to reward a successful researcher. However, if the firm?s R&D investment mainly matters, including a CNC in the contract is optimal, as it ensures the firm?s incentives to invest.