and Thomas Rønde
Massimo Motta: European University Institute, Florence, Postal: European University Institute, , Department of Economics, , via dei Roccettini9, , I-50016 San Domenico di Fiesole (FI), Italy
Thomas Rønde: University of Mannheim, Postal: University of Mannheim, Copenhagen Business School, and C.E.P.R., London
Abstract: We show that when the researcher’s (observable but not contractible) contribution to innovation is crucial, a covenant not to compete (CNC) reduces e.ort 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.
34 pages, September 1, 2002
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