UC Berkeley

This dissertation comprises three studies that examine competition, public policy, and innovation. The first study investigates how product market competition affects the intensity and breadth of innovation activities of firms, using the formation and breakup of price fixing cartels to proxy for competition or lack thereof. The second and third studies investigate how public policy on restrictive covenants, namely non-compete agreement, affects business dynamism/concentration and strategic knowledge management of firms, respectively.

For the first study, I assembled a unique dataset comprising 461 prosecuted cartel cases in the U.S. from 1975-2016, where I match 1,818 collusive firms to firm-level data on patenting, R&D investment, and other measures of innovation. I then use a difference-in-difference methodology, matching colluding firms to various counterfactual firms. Empirical results show a negative causal relationship between competition and innovation in the cartel context. When collusion suppressed market competition, colluding firms increased R&D investment by 12%, patenting by 51%, and top-quality patents by 20%. Furthermore, firms also broadened their areas of innovation when competition was suppressed by collusion, with the number of patented technology fields increasing by 33%. The increased and broadened innovation activities reverted back, close to previous levels, when competition was restored by collusion breakup. Further tests suggest that financial constraint (“ability to innovate”) and the industry’s growth rate (“incentive to innovate”) are important economic mechanisms behind the trade-off between price competition in the product market and innovation growth.

I then turn to labor market competition and study the effects of legal enforcement of non-competition agreements on business activities, including entrepreneurship and innovation. The second study, co-authored with Lee Fleming, isolates the impact of non-compete enforcement on regional business dynamism and concentration by focusing on Florida’s 1996 legislative change that eased restrictions on the enforcement of non-competes. We first establish the contrast between legal regimes and note that wage trends did not change when comparing wages before and after the passage of the legislation. Difference-in-differences models show that following the change, establishments of large firms were more likely to enter Florida; these firms also created a greater proportion of jobs and increased their share of employment in the state. Entrepreneurs or establishments of small firms, in contrast, were less likely to enter Florida following the law change; they also created a smaller proportion of new jobs and decreased their share of employment. Consistent with these location and job creation dynamics, a variety of business concentration measures increased significantly following the law change in Florida. Nationwide cross-sections demonstrate consistent correlations between state-level non-compete enforcement and business dynamism/concentration dynamics illustrated in Florida.

Expanding the questions on the impact of labor market competition and worker mobility, the third study examines how firms strategically manage innovation processes and outcomes against mobility of workers (this work is co-authored with Wyatt Lee). In 1998, a California Court of Appeal ruled that non-compete agreements (“non-competes”) signed by an employer and an employee outside of California are not enforceable in California. This court decision created a loophole for employees of non-California firms, as these firms could no longer enforce non-competes by which their employees were previously bound, and the employees could now move freely to California firms. We use a difference-in-difference methodology comparing firms in states that have been enforcing non-competes with firms in states that have not been enforcing non-competes. We find that this California-driven loophole significantly affected knowledge management and innovation processes of non-California firms that are affected. These firms decreased R&D investments (an important input for innovation) because such R&D activities became more costly and risky. On the other hand, these firms increased patent filings (without compromising their quality) despite the decrease in innovation input. In other words, firms increased their propensity to patent, suggesting that firms rely more on strategic patenting than on secrecy when facing higher mobility of and competition for workers.