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Proponents of labor mobility restrictions argue that innovation incentives more than offset
harm to workers. Yet the causal effect of such policies on innovation is an open empirical
question. Leveraging plausibly exogenous state-level changes in the enforceability of noncompete
agreements, we find a significant negative effect on innovation. This effect is even
larger for the most novel and innovative patents and firms. Further analysis shows that
these negative effects on innovation cannot be explained by entry alone and instead likely
result from reduced knowledge flows. Our findings suggest that labor mobility plays a
crucial role in spreading knowledge across firms.
