Non-Disclosure Agreements and Externalities from Silence

Abstract

We examine how non-disclosure agreements (NDAs) influence the flow of information in labor markets, leveraging workers' reviews of their employers on the website Glassdoor. Beginning in 2019, three states passed laws that 'narrowed NDAs' by prohibiting firms from using NDAs to restrict workers from sharing about unlawful conduct, and strengthened workers' anti-retaliation protections for speaking out. On average, these laws reduced ratings of firms by approximately 5%, with stronger effects in industries where NDAs are more prevalent. The rise in negative information pertains to many dimensions of jobs, including a 22% increase in reviews related to problems with harassment. The laws also reduced the likelihood with which employees who write negative reviews conceal aspects of their identity---consistent with reduced concern about retaliation risks. Finally, these laws increased dispersion in firm ratings within a market, suggesting that broad NDAs facilitate equilibria where firms with worse employment practices can 'pool' reputations among firms with better practices. Our results highlight how firms can use broad NDAs to preserve their reputation by silencing workers, but doing so imposes negative externalities on jobseekers who value such information and competing 'high-road' employers who are less able to distinguish themselves.