The Behavioral Effects of (Unenforceable) Contracts

67 Pages Posted: 26 Oct 2016 Last revised: 7 Oct 2020

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: September 18, 2020

Abstract

Do contracts influence behavior independent of the law governing their enforceability? We explore this question in the context of employment noncompetes, using nationally representative data for 11,500 labor force participants. We show that noncompetes are associated with reductions in employee mobility and changes in the direction of that mobility (i.e., toward noncompetitors) in both states that do and do not enforce noncompetes. Decomposing mobility into job offer generation and acceptance, we detect no evidence of differences in job search, recruitment, or offer activity associated with noncompetes. Rather, we find that employees with noncompetes—even in states that do not enforce them—frequently point to their noncompete as an important reason for declining offers from competitors. Our data further show that these employees’ beliefs about the likelihood of a lawsuit or legal enforcement are important predictors of their citing a noncompete as a factor in their decision to decline competitor offers.

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 (September 18, 2020). Journal of Law, Economics, and Organization, 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 )

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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 )

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

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