Client-Based Entrepreneurship
36 Pages Posted: 26 Apr 2010 Last revised: 16 Jul 2023
Date Written: April 2010
Abstract
Client relationships create value, which employees may try to wrest from their employers by setting up their own firms. If when an employer and worker establish a relationship they cannot contract on the output and profits of the worker's prospective new firm, the employer counters by inducing the worker to sign a contract that prohibits him from competing or soliciting the current client in the event of termination of employment. The socially optimal level of entrepreneurship will nevertheless be achieved if clients, employers, and workers can renegotiate these restrictive employment contracts and make compensating transfers. If workers cannot finance transfers to employers, however, employers and workers will sign contracts that are too restrictive and produce too little entrepreneurship, and governments can increase welfare by limiting enforcement of these contracts. With or without liquidity constraints, locations where non-compete contracts are less enforced will attract more clients and have higher employment and output.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999
By Paul A. Gompers, David S. Scharfstein, ...
-
Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999
By Paul A. Gompers, David S. Scharfstein, ...
-
Entrepreneurship in Equilibrium
By Denis Gromb and David S. Scharfstein
-
Entrepreneurship in Equilibrium
By Denis Gromb and David S. Scharfstein
-
By Bruce Fallick, Charles A. Fleischman, ...
-
By Bruce Fallick, Charles A. Fleischman, ...
-
By Ariel Pakes and Shmuel Nitzan
-
Optimal Project Rejection and New Firm Start-Ups
By Bruno Cassiman and Masako Ueda