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The enforceability of non-compete agreements and different types of entrepreneurship: evidence from Utah and Massachusetts

Ege Can (Department of Economics, Accounting, and Finance, College of Business, The University of Alabama in Huntsville, Huntsville, Alabama, USA)
Frank M. Fossen (Department of Economics, University of Nevada Reno, Reno, Nevada, USA) (Institute of Labor Economics (IZA), Bonn, Germany)

Journal of Entrepreneurship and Public Policy

ISSN: 2045-2101

Article publication date: 16 August 2022

Issue publication date: 25 October 2022

151

Abstract

Purpose

The purpose of this paper is to expand the empirical literature on the association between non-compete agreement (NCA) enforceability and entrepreneurship by investigating how NCA policies affect different types of entrepreneurship with incorporated and unincorporated businesses.

Design/methodology/approach

The authors estimate difference-in-differences regressions based on individual-level data. This allows to control for heterogeneity at the individual level. Additionally, the authors provide graphical evidence using the synthetic control method (SCM).

Findings

The authors' findings show that the decrease in the enforceability of NCAs in Massachusetts resulted in a higher rate of unincorporated entrepreneurship among low-wage workers. At the same time, there was no sizable effect on the rate of incorporated entrepreneurship. For Utah, the authors' results indicate that the reform increased both types of entrepreneurship. The findings imply that states can promote entrepreneurial activity by reducing the enforceability of NCAs. The way of changing the enforceability of NCAs matters, as different provisions encourage different types of entrepreneurship in a given state.

Originality/value

The authors contribute to the literature on NCA enforceability effects on entrepreneurship in three ways. First, the authors utilize two quasi-experiments, the NCA policy changes in Utah in 2016 and Massachusetts in 2018, limiting NCAs to one year for all workers. Second, to the authors' knowledge, this is the first individual-level analysis that separates self-employment with incorporated and unincorporated businesses as two different types of entrepreneurship to analyze potentially heterogeneous effects of NCAs. Third, this is the first study to utilize American Community Survey (ACS) data in this literature.

Keywords

Acknowledgements

The authors thank Bibek Adhikari, Wafa Orman and the participants at the 2021 Southern Economic Association Annual Meeting for comments and suggestions that have greatly improved the quality of this paper. The authors also thank the Southern Economic Association for funding the authors' presentation at the 2021 Annual Meeting. Frank M. Fossen thanks the Ewing Marion Kauffman Foundation for funding of the research project RG-201802-3798. The contents of this publication are solely the responsibility of the authors. A prior working paper circulated under the title “The Effects of Non-Compete Agreements on Different Types of Self-Employment: Evidence from Massachusetts and Utah”.

Citation

Can, E. and Fossen, F.M. (2022), "The enforceability of non-compete agreements and different types of entrepreneurship: evidence from Utah and Massachusetts", Journal of Entrepreneurship and Public Policy, Vol. 11 No. 2/3, pp. 223-252. https://doi.org/10.1108/JEPP-04-2022-0055

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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