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Subjective Beliefs About Contract Enforceability, Jj Prescott, Evan Starr

Law & Economics Working Papers

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 …