Entrepreneurship, Mobility and Knowledge of Noncompete Laws

Abstract: Recent work has empirically identified the importance of covenants not to compete (noncompetes) and their enforceability for entrepreneurship (Samila and Sorenson 2011, Garmaise 2011), firm innovation and performance (Conti 2013, Starr et al. 2015), as well as employee outcomes including mobility, wages, and training (Marx et al. 2009, Marx et al. 2015, Starr 2015, Starr et al. 2016). A prominent feature of this literature is that noncompetes are differentially enforceable across states; for example, they are virtually banned in California and North Dakota but in Florida they can be enforced without taking into consideration the harm done to the employee. In this paper, we utilize new survey evidence to consider what employees and potential entrepreneurs believe about the enforceability of their noncompetes, whether such beliefs align with the actual laws, and how such beliefs affect mobility and entrepreneurship decisions. We then randomly provide individuals with information on the actual noncompete laws of their state and subsequently examine how potential entrepreneurship and mobility decisions change as a result. Preliminary results show that employees are vastly uninformed regarding their state’s noncompete laws, especially in states where they are not enforceable. Providing individuals with accurate information on the nonenforceability of their noncompetes dramatically increases their willingness to move or form a competing venture. These results suggest that studies of noncompete enforceability, which constitute the vast majority of this literature, may dramatically underestimate the actual impact of noncompetes because noncompetes have effects in states where they are not enforceable since individuals believe them to be enforceable. Furthermore, our results suggest that the passage of laws which void noncompetes will be ineffectual if such bans are not communicated with the relevant population.