The Behavioral Effects of (Unenforceable) Contracts

Abstract

Do contracts influence behavior independent of the law governing their enforceability? We explore this question in the context of employment noncompetes, using nationally representative data for 11,500 labor force participants. We show that noncompetes are associated with reductions in employee mobility and changes in the direction of that mobility (i.e., toward noncompetitors) in both states that do and do not enforce noncompetes. Decomposing mobility into job offer generation and acceptance, we detect no evidence of differences in job search, recruitment, or offer activity associated with noncompetes. Rather, we find that employees with noncompetes—even in states that do not enforce them—frequently point to their noncompete as an important reason for declining offers from competitors. Our data further show that these employees’ beliefs about the likelihood of a lawsuit or legal enforcement are important predictors of their citing a noncompete as a factor in their decision to decline competitor offers.

Keywords: Unenforceable Contracts, Covenants Not to Compete, Employee Mobility, In Terrorem Effects

JEL Classification: J41, J42 J62, K31