Nondisclosure agreements and externalities from silence

Abstract

How do contractual restrictions on worker voice affect information flows about employers? We develop a framework in which the legal risk from violating a nondisclosure agreement (NDA) reduces the willingness of workers to share negative information, making it more difficult for high-road employers to differentiate themselves to workers. Empirical support for these ideas comes from studying the relationship between NDA use and the content of Glassdoor reviews after three states prohibited employers from using NDAs to conceal unlawful conduct. By curtailing the flow of negative information, NDAs impose negative externalities on workers who value such information and on competing employers who are less able to stand out.