Star Wars: Exclusive Talent and Collusive Outcomes in Labor Markets

Abstract

Exclusive employment contracts and collusion on wages are alternative mechanisms that firms may use to extract surplus from highly productive workers (“stars”). Exclusive employment contracts (i.e., “covenant not to compete”) are common in many industries, but the Courts often refrain from enforcing them, citing harm to workers due to restricted turnover. We analyze the interaction between these two channels of surplus extraction and argue that in the presence of collusion, enforcement of exclusive contracts can, in fact, benefit the workers: Although a strong enforcement of exclusivity restricts labor turnover, it can also hinder the firms' ability to sustain collusion in the labor market. We characterize the optimal level of enforcement and find that both perfect enforcement and no enforcement can be socially suboptimal. Moreover, a stronger enforcement can improve matching efficiency by rendering collusion unsustainable and may lead to a more equitable surplus distribution between the firms and the workers. (JEL J4, K21, L42, L14, M5).