The Economic Costs of Court Decisions Concerning Dismissals in Japan: Identification by Judge Transfers

Abstract

Despite its significant influence on the actual enforcement of the law, the economic cost of court discretion has been ignored in the literature on employment protection. This paper exploits a distinctive feature of the Japanese judicial system, periodic judge transfers, to identify court discretion. Because judges move across local labor markets while a single national court system ensures that there are no legal boundaries between regions, it is possible to shut down any confounding relationships between current litigation outcomes and local labor market. A key finding is that an increase in the worker victory ratio in adjustment dismissal litigations in the last 10 years reduces rates of both job creation and destruction. Ignoring the uncertainty inherent in court decisions would lead to misspecification of the actual cost of employment protection, especially in countries with high judicial activism.

Keywords: Employment protection, law enforcement, judge effects, many instruments

JEL Classification: J65, K31, K42