Tragedy of the Commons: It’s (Really) Time to Ban Non-Compete Agreements
On snowy days in certain neighborhoods of our great city it is not unusual for someone to put an old trash can in an on-street parking space that they have recently cleared. We all know there is threat implied: if you take the spot, you will regret it. Given the effort expended to clear the spot, the person who did all the work may feel justified in blocking others from taking it. But we all know that this tends to screw things up for everyone. Pretty soon cars circling looking for parking spaces clog the roads, and nobody can get home, even if they have blocked a spot.
This is a textbook example of the classic “tragedy of the commons” problem, in which following our personal self-interest eventually screws things up for everyone.
I believe the use of non-competes falls into the same category. By laying claim to our best employees, and keeping them from working for others, our economy becomes less agile, many of our best employees get tied up in what may not be the best job for them, and their only option is to move to a state that prohibits non-competes.
Don’t get me wrong. I use non-competes in my business, and nearly everyone else I know does, too. Non-competes are in our individual self-interest. The problem is just that they probably aren’t in our collective interest.
In states where non-competes are unenforceable, such as California, we know from our brethren there that employees rapidly gain experience, moving from company to company in quick succession. One of the results of this is that the best people quickly flock to the best companies as they start to show promise. This may be one reason that the world’s tech powerhouses like Google and Cisco disproportionately come from California.
While one could argue that banning non-competes hurts California companies individually, empirical evidence seems to suggest that the system benefits to society collectively outweigh this. In addition to the observation that the Googles and Ciscos of the world tend to grow more commonly in California, it also appears that investors are most happy to put their money there. Venture capital investment there has grown much faster there in the past decade than it has in Massachusetts, reaching a level now that is about three times that of Massachusetts.
This problem is not just theoretical. It is practical, and personal. Twice in the last few months, I have seen cases where great employees were prevented from working for the company that could make the best use of their talents. In one of these cases, the current employer was effectively out of business, although not yet legally dissolved, and for reportedly emotional reasons suggested it would litigate if the employee in question moved to a healthier company in the same industry. This scared off the new employer, who simply didn’t want the legal risk. The employee had to switch industries to take a new job.
Years ago, one of our executives left my employ at Cambridge Innovation Center. I was somewhat concerned that he would help others compete with us, and I reminded him of his non-compete. Not long after, I learned he had moved to California. While this may have benefitted my firm, it was clearly not good for Massachusetts.
I believe movement from company to company is a form of innovation pollination, and we should encourage it. It is time for our lawmakers to ban non-competes.
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