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Why do skilled services firms use noncompete agreements (NCAs), which prohibit workers from leaving firms and competing against them? We conduct a survey of physicians linking NCA use to labor-market outcomes and firm performance and show that by deterring poaching of patients NCAs increase the return to job tenure, with larger effects in states with more enforceable NCA laws. These effects are consistent with NCAs enabling practices to allocate clients to new physicians through intrafirm referrals, reducing a form of investment holdup. We discuss an array of supporting suggestive evidence, but also find NCAs provide some benefits by reducing job turnover. [End Page 1025] [ABSTRACT FROM AUTHOR]
