Do Firms Value Court Enforceability of Noncompete Agreements? A Revealed Preference Approach

Abstract

We study whether firms value court enforceability of their workers’ noncompete agreements (NCAs), leveraging a 2020 Washington law that made NCAs unenforceable for workers earning less than a threshold of $100k per year (indexed to inflation), covering approximately 79% of Washing-ton workers. If firms value the ability to enforce NCAs in court, then they should be willing to give just-below threshold workers small raises to reach the threshold, resulting in excess mass at or just above the threshold and missing mass below. Using administrative data from Washington and a variety of difference-in-differences approaches, we find no evidence of such bunching, even in industries where NCAs are common and where efficiency arguments are the most plausible. Data from a survey of Washington employment attorneys reinforces these results and suggests that firms do not value the ability to enforce NCAs for near-threshold workers because they rarely need to go to court to enforce NCAs and because firms can use other, related restrictions instead of relying on NCAs. Lastly, we find no evidence that banning NCAs for workers below the 79th earnings percentile destroyed value among publicly traded firms.

Keywords: Noncompete Agreements, Revealed Preference, Court Enforceability, Bunching

JEL Classification: J18, J24, J31, J42, J62, J68, K12, K21, K31, K42