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Nondisclosure agreements and externalities from silence.
Jason Sockin1, Aaron Sojourner2, Evan Starr3
1Department of Economics, School of Industrial and Labor Relations, Cornell University, Ithaca, NY 14853.
Summary
Nondisclosure agreements (NDAs) restrict workers from sharing negative employer information, hindering high-road companies from attracting talent. This limits valuable information flow for workers and competitors.
Area of Science:
- Labor Economics
- Organizational Behavior
- Contract Law
Background:
- Contractual restrictions, such as nondisclosure agreements (NDAs), can impact worker communication.
- The flow of information regarding employer practices is crucial for labor markets.
Purpose of the Study:
- To analyze how contractual restrictions on worker voice, specifically NDAs, affect information dissemination about employers.
- To investigate the impact of NDAs on the ability of 'high-road' employers to signal positive attributes to potential employees.
Main Methods:
- Developed a theoretical framework examining the relationship between legal risks of NDAs and worker willingness to share negative information.
- Conducted empirical analysis using Glassdoor reviews in three states that restricted NDA use for concealing unlawful conduct.
Main Results:
- Legal risks associated with violating nondisclosure agreements (NDAs) decrease workers' willingness to share negative information.
- NDAs make it harder for ethical, 'high-road' employers to distinguish themselves to prospective employees.
- Curtailment of negative information flow by NDAs creates negative externalities for workers and competing firms.
Conclusions:
- Nondisclosure agreements (NDAs) can distort labor market information, disadvantaging workers and ethical employers.
- Policy interventions limiting the scope of NDAs can improve information transparency and market efficiency.
- Understanding the impact of contractual clauses on information flow is vital for labor market dynamics.
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