Subjective Beliefs about Contract Enforceability

82 Pages Posted: 13 Jul 2021 Last revised: 29 Jul 2022

See all articles by J.J. Prescott

J.J. Prescott

University of Michigan Law School

Evan Starr

University of Maryland Robert H Smith School of Business

Date Written: July 19, 2022

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

Suggested Citation

Prescott, J.J. and Starr, Evan, Subjective Beliefs about Contract Enforceability (July 19, 2022). U of Michigan Law & Econ Research Paper 22-028, Available at SSRN: https://ssrn.com/abstract=3873638 or http://dx.doi.org/10.2139/ssrn.3873638

J.J. Prescott

University of Michigan Law School ( email )

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Evan Starr (Contact Author)

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

United States
(301) 405-2320 (Phone)

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