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Trade Secret Laws, Labor Mobility and Innovations

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We show that when the researcher’s (observable but not contractible) contributionto innovation is crucial, a covenant not to compete (CNC) reduces effort and profitsunder both spot and relational contracts. Having no CNC allows the researcher toleave for a rival. This alleviates a commitment problem by forcing the firm to rewarda 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 toinvest.JEL Codes: J3, K2, L14, O31, O34.Keywords: Innovation, intellectual property rights, labor contracts, poaching, relationalcontracts, start-ups.

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Massimo Motta, Thomas Rønde

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