In the growing start-up culture in India, the need to enforce non-compete clauses in employee agreements has become relevant. However, according to a study conducted by James Rauch, the enforcement encourages original ideas to find a way more easily than spin-offs and will restrict entry of socially profitable spin-offs. That said, Rauch says that non-enforcement helps the social welfare of the company more. In fact, entrepreneurs might also face constraints if lenders know that they have to buy out their non-competes to start the company.
Title: Dynastic Entrepreneurship, Entry and Non-Compete Enforcement
Source: National Bureau for Economic Research