4 ms·

In theory, it lowers the risk of hiring in certain situations. So, if the alternative is not hiring, that's beneficial. For a lot of companies, the "sauce" is

by Digory 4y ago

In theory, it lowers the risk of hiring in certain situations. So, if the alternative is not hiring, that's beneficial. For a lot of companies, the "sauce" is a personal relationship that isn't trade secret. If you hire a salesman, and give them access to Mr. Big, you create an incentive for the employee to trade the relationship for your competitor's money. Penalizing the change in employer is not the only way to deal with it, of course. Without a non-compete, you might have to buy/keep the salesman's loyalty. Which may or may not be an economic deadweight.

gen220 4y ago
That makes sense as to why an employer would want a non-compete. Is there some way that this translates into why "we the people" would want to allow companies to enforce non-competes? From my perspective, if a company's sauce is personal relationships, the non-compete is not particularly effective in engendering loyalty and extracting the greatest value from that relationship. A disaffected salesperson is not going to be enthusiastic about leveraging their relationships for an employer they're unhappy with -- whether they're under a non-compete, or not. This means they'll extract the minimal value to keep their salary, but not the maximal value out of the potential they have access to. In fact, a non-compete prevents that salesperson from bringing that relationship to a different company, where that relationship might produce greater dividends for "we the people" (as measured by the new company's ability to attract salespeople and engender their loyalty).
- Digory 4y ago
  1. Shifting profits from the entrepreneur (with skin in the game of providing consumer wants) to the middleman can be deadweight. You'd want some evidence that rewarding disloyal middlemen results in we the consumer surplus, not just a flourishing middle-man economy. There can be price-discovery benefits to middlemen, like market makers at the NYSE. But the financial markets usually involve fungible goods. Consumers seem to benefit from finding ways around the middlemen, though. 2. We the people have egalitarian ideals about jobs and opportunities. The old-fashioned way to 'lock in ' people to loyalty is to hire family or from the same social strata. Historically, those benefits have been distributed unfairly. So the non-compete provides some mechanism for the "haves" to spread around opportunities to the "have-not-so-many-reasons-to-be-loyal," understanding that the law will enforce the agreement to be not-disloyal.
  - gen220 4y ago
    Good points! Let me try to dissect them, let me know what you think. 1. I agree with the themes of not paying disloyal middlemen, but I'm not sure if it applies to the example. > You'd want some evidence that rewarding disloyal middlemen results in we the consumer surplus, If entrepreneur Y is willing to pay 2x the salary of entrepreneur X for the same employee, presumably its because Y thinks they can use the salesperson's relationships (at least) twice as productively. In that case, Y has a product to sell that is twice as valuable as X's. As a consumer, don't we want companies we engage with to use the most valuable products? I'm not suggesting that we pay unaligned people more (obviously, this is bad). Rather, I'm saying we shouldn't erect barriers to prevent disgruntled employees from leaving, because we're paying the opportunity cost of them not being a more productive employee at a competitor. 2. I'm not sure if this holds up in 2023, where talent networks are global and talent discovery is so cheap. I think this argument makes sense if the skills of people who are signing non-competes were not so rare and in-demand. If I exclusively depended on family ties to run a company in 2023, I'd expect my competition to run me over.
    - Digory 4y ago
      1. > "presumably it's because Y thinks they can use the salesperson's relationships (at least) twice as productively." I'm not sure that's true. Y thinks Y having the profits from S's relationships are worth the marginal cost of paying 2 x $X (the salary). Presumably, he could offer that to S's Boss -- but the angle is that S will usually sell out for less. S has less skin in the game. As you note, it's hard to tell how much S is actually benefitting consumers, versus how much they're trying to extract rent once they've got Boss over a barrel. And it seems the best time to solve that is with a voluntary agreement between consenting adults before Salesman has Boss over a barrel. If Boss runs the risk of being gutted by S, the usual response is to raise prices, or conclude that it's just too expensive to make this good. So probably consumer prices rise under this regime. Now, maybe if you're the party of middle management, that's a political good! 2. I don't know enough about that to BS beyond what I've BS'd already. But it strikes me as mostly a toss up -- sometimes it's good, sometimes it's bad. And, again, I think the libertarians are mostly right about respecting deals between consenting adults, even when there's a wealth or social gap. The parties will have a much better idea about when they're good and bad. I'm not sure why you'd outlaw them. I guess the best argument I have against myself is that California has already done something similar for awhile, and it hasn't crippled their market for talent. So whatever effect I might be worried about, it's de minimus, and it seems to be a morale booster for middle-management types.

by Digory 4y ago

gen220 4y ago

That makes sense as to why an employer would want a non-compete. Is there some way that this translates into why "we the people" would want to allow companies to enforce non-competes? From my perspective, if a company's sauce is personal relationships, the non-compete is not particularly effective in engendering loyalty and extracting the greatest value from that relationship. A disaffected salesperson is not going to be enthusiastic about leveraging their relationships for an employer they're unhappy with -- whether they're under a non-compete, or not. This means they'll extract the minimal value to keep their salary, but not the maximal value out of the potential they have access to. In fact, a non-compete prevents that salesperson from bringing that relationship to a different company, where that relationship might produce greater dividends for "we the people" (as measured by the new company's ability to attract salespeople and engender their loyalty).

Digory 4y ago
1. Shifting profits from the entrepreneur (with skin in the game of providing consumer wants) to the middleman can be deadweight. You'd want some evidence that rewarding disloyal middlemen results in we the consumer surplus, not just a flourishing middle-man economy. There can be price-discovery benefits to middlemen, like market makers at the NYSE. But the financial markets usually involve fungible goods. Consumers seem to benefit from finding ways around the middlemen, though. 2. We the people have egalitarian ideals about jobs and opportunities. The old-fashioned way to 'lock in ' people to loyalty is to hire family or from the same social strata. Historically, those benefits have been distributed unfairly. So the non-compete provides some mechanism for the "haves" to spread around opportunities to the "have-not-so-many-reasons-to-be-loyal," understanding that the law will enforce the agreement to be not-disloyal.
- gen220 4y ago
  Good points! Let me try to dissect them, let me know what you think. 1. I agree with the themes of not paying disloyal middlemen, but I'm not sure if it applies to the example. > You'd want some evidence that rewarding disloyal middlemen results in we the consumer surplus, If entrepreneur Y is willing to pay 2x the salary of entrepreneur X for the same employee, presumably its because Y thinks they can use the salesperson's relationships (at least) twice as productively. In that case, Y has a product to sell that is twice as valuable as X's. As a consumer, don't we want companies we engage with to use the most valuable products? I'm not suggesting that we pay unaligned people more (obviously, this is bad). Rather, I'm saying we shouldn't erect barriers to prevent disgruntled employees from leaving, because we're paying the opportunity cost of them not being a more productive employee at a competitor. 2. I'm not sure if this holds up in 2023, where talent networks are global and talent discovery is so cheap. I think this argument makes sense if the skills of people who are signing non-competes were not so rare and in-demand. If I exclusively depended on family ties to run a company in 2023, I'd expect my competition to run me over.
  - Digory 4y ago
    1. > "presumably it's because Y thinks they can use the salesperson's relationships (at least) twice as productively." I'm not sure that's true. Y thinks Y having the profits from S's relationships are worth the marginal cost of paying 2 x $X (the salary). Presumably, he could offer that to S's Boss -- but the angle is that S will usually sell out for less. S has less skin in the game. As you note, it's hard to tell how much S is actually benefitting consumers, versus how much they're trying to extract rent once they've got Boss over a barrel. And it seems the best time to solve that is with a voluntary agreement between consenting adults before Salesman has Boss over a barrel. If Boss runs the risk of being gutted by S, the usual response is to raise prices, or conclude that it's just too expensive to make this good. So probably consumer prices rise under this regime. Now, maybe if you're the party of middle management, that's a political good! 2. I don't know enough about that to BS beyond what I've BS'd already. But it strikes me as mostly a toss up -- sometimes it's good, sometimes it's bad. And, again, I think the libertarians are mostly right about respecting deals between consenting adults, even when there's a wealth or social gap. The parties will have a much better idea about when they're good and bad. I'm not sure why you'd outlaw them. I guess the best argument I have against myself is that California has already done something similar for awhile, and it hasn't crippled their market for talent. So whatever effect I might be worried about, it's de minimus, and it seems to be a morale booster for middle-management types.