Subjective Beliefs about Contract Enforceability

Abstract

This article assesses the content, role, and adaptability of subjective beliefs about contract enforceability in the context of postemployment covenants not to compete (“noncompetes”). We show that employees tend to believe that their noncompetes are enforceable, even when they are not. We provide evidence for both supply- and demand-side stories that explain employees’ persistently inaccurate beliefs. Moreover, we show that believing that unenforceable noncompetes are enforceable likely causes employees to forgo better job options and to perceive that their employer is more likely to take legal action against them if they choose to compete. Finally, we use an information experiment to inform employees about the enforceability of their noncompete. While this information matters for employee beliefs and prospective behavior, it does not appear to eliminate an unenforceable noncompete as a factor in the decision to take a new job. We discuss the implications of our results for the policy debate regarding the enforceability of noncompetes.

Keywords: Subjective Beliefs, Contract Enforceability, Covenants Not to Compete, Employee Mobility

JEL Classification: K12, J41, J68