The Behavioral Effects of (Unenforceable) Contracts

52 Pages Posted: 26 Oct 2016 Last revised: 18 Dec 2019

See all articles by Evan Starr

Evan Starr

University of Maryland Robert H Smith School of Business

J.J. Prescott

University of Michigan Law School

Norman Bishara

The Stephen M. Ross School of Business at the University of Michigan

Date Written: December 18, 2019

Abstract

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

Starr, Evan and Prescott, J.J. and Bishara, Norman D, The Behavioral Effects of (Unenforceable) Contracts (December 18, 2019). U of Michigan Law & Econ Research Paper No. 16-032. Available at SSRN: https://ssrn.com/abstract=2858637 or http://dx.doi.org/10.2139/ssrn.2858637

Evan Starr (Contact Author)

University of Maryland Robert H Smith School of Business ( email )

United States
(301) 405-2320 (Phone)

J.J. Prescott

University of Michigan Law School ( email )

3170 South Hall
701 S. State St.
Ann Arbor, MI 48109
United States
734-763-2326 (Phone)

Norman D Bishara

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-6823 (Phone)

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