Subjective Beliefs about Contract Enforceability

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 demonstrate that employees tend to believe that even clearly unenforceable noncompetes are enforceable, including their own. 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 opportunities and to perceive that their employer is more likely to sue 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 employees’ 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 conclude with implications for the policy debate regarding the enforceability of noncompetes.