The Behavioral Effects of (Unenforceable) Contracts
52 Pages Posted: 26 Oct 2016 Last revised: 18 Dec 2019
Date Written: December 18, 2019
Do contracts influence behavior independent of the law governing their enforceability? We explore this question in the context of employment covenants not to compete (“noncompetes”) and employee mobility, using nationally representative data on 11,500 labor force participants. We show that noncompetes are associated with reductions in employee mobility (resulting, for example, in 11% longer tenures) and changes in the direction of mobility (i.e., toward noncompetitors) in both states that do and do not enforce noncompetes. Decomposing the mobility process into job offer generation and job offer acceptance, we find little evidence of lower search, recruitment, or job offer activity for the noncompete-bound. Rather, we find that employees with noncompetes—in both states that do and do not enforce them—frequently point to their noncompete as a reason for turning down job offers from competitors. Our data also show that individuals who believe their employer will sue them over a noncompete, who believe a court will enforce their noncompete, or who have been reminded of their noncompete by their employer, are more likely to cite their noncompete as a factor when declining competitor offers, regardless of a state’s enforcement policies.
Keywords: Unenforceable Contracts, Covenants Not to Compete, Employee Mobility, In Terorrem Effects
JEL Classification: J41, J42 J62, K31
Suggested Citation: Suggested Citation