The Labor Effects of Judicial Bias in Bankruptcy
48 Pages Posted: 19 Jan 2021 Last revised: 12 Jun 2023
Date Written: December 29, 2020
We study the effect of judicial bias favoring firm continuation in bankruptcy on the labor market outcomes of employees by exploiting the random assignment of cases across courts in the State of Sao Paulo in Brazil. Employees of firms assigned to courts that favor firm continuation are more likely to stay with their employer, but they earn, on average, lower wages three to five years after bankruptcy. We discuss several potential mechanisms that can rationalize this result, and provide evidence that imperfect information about outside options in the local labor market and adjustment costs associated with job change play an important role.
Keywords: Brazil, Wages, Information Frictions, Financial Distress
JEL Classification: G33, G20, K10
Suggested Citation: Suggested Citation