Legal Commentary

Imagine an academic world with no lateral hiring. Not much to counteract the moral hazard embedded in job tenure. For some, scholarly productivity and teaching performance will remain constant. These are people whose motivation is completely de-coupled from the external rewards of outside recruitment. Others will evidence a noticeable drop in their work product.

Traditional economic models view post employment intellectual property restrictions (?EIP?) such as non-competes, expansive trade secret protections, patent holdover agreements, and NDAs, as a necessary limitation stemming from the fact that absent such contractual protection, employer would under-invest in employee training (Rubin & Shedd 1981; Glick 2002). Further, because employees generally lack the resources to self-finance their training costs, restrictive covenants are predicted to promote efficient investment in human capital (Posner & Triantis). In a new project, I seek to enrich the orthodox analysis of human capital development. I suggest a dynamic perspective, looking at the investment incentives of both the employer and the employee over time. The attempt is to integrate the following assumptions:

Time 0 (During employment relationship):

1) EIP restrictions encourage firms to invest in their managers? human capital.

2) EIP restrictions discourage managers to invest in their own human capital.

3) The absence of EIP restrictions encourages compensation forms that are performance-based.

   Time 1 (Post-employment):

4) EIP restrictions prevent loss of valuable employees and misappropriation of proprietary information.

5) EIP restrictions reduce mobility and efficient ee-firm fit, inter-jurisdictional brain gain, institutional new blood, entrepreneurship, social capital, network density, and tacit knowledge spillovers.

Almost half a century ago, Nobel laureate Kenneth Arrow argued that competition, not central control, is what fuels innovation. Writing specifically about human capital, Arrow observed that ?mobility of personnel among firms provides a way of spreading information.? Contemporary markets and new scientific studies provide empirical bases for Arrow?s assertion. Drawing on new experimental and empirical data, I suggest that under certain conditions post-employment restrictions will reduce overall investment. In time 0, this will happen when self-investments in one?s human capital, stimulated by external prospects and/or internal performance incentives, is of greater effect than the investment of a company (Amir & Lobel 2010; Garmaise 2009). In the repeat game represented by time 1, overall gain happens when the effects of positive spillovers outweigh the negative externalities of human capital and information flows.

Recent field data provides evidence of such occurrences in both stages of the single firm level and the repeat game of job mobility at the industry and regional levels. Further, in several experimental projects with collaborators, we aim to provide insights on behavioral effects that support the dynamic double-perspective model. In Innovation Motivation, the first series of experiments, in collaboration with the one and only On Amir, we simulate market employment and seek to identify the effect of restrictive covenants on performance and motivation.  In my next post I will describe our experimental study and our findings.