Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/223043 
Year of Publication: 
2020
Series/Report no.: 
ECONtribute Discussion Paper No. 021
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
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.
Subjects: 
non-compete clause
minimum wage
limited liability
moral hazard
rent extraction
JEL: 
D86
J32
J41
K31
Document Type: 
Working Paper

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