Non-Disclosure Agreements and Externalities from Silence

Abstract

Do employment restrictions which prohibit workers from disclosing misconduct at work, which we refer to as `broad non-disclosure agreements' (NDAs), distort labor markets? We develop a framework in which the legal risk from violating a broad NDA reduces worker willingness to share negative information about their employers, making it more difficult for high-quality employers to differentiate themselves to jobseekers. Changes in the content of Glassdoor reviews following the passage of three state laws that prohibited employers from using NDAs to conceal unlawful workplace conduct support this idea. By curtailing the flow of negative information, broad NDAs impose negative externalities on jobseekers who value such information and on competing employers who are less able to stand out.

Keywords: Imperfect Information, Non-Disclosure Agreements, Externalities, Firm Reputation

JEL Classification: M55, K31, J58