The Labor Effects of Judicial Bias in Bankruptcy

Abstract

We exploit the random assignment of cases across courts in the state of Sao Paulo in Brazil to study the effect of judicial bias on labor market outcomes. Employees assigned to courts that favor firm continuation are more likely to stay with their employer, but they earn, on average, lower wages after bankruptcy. The effect is concentrated in periods of economic expansion. We explore several potential mechanisms that can drive this result, including risk aversion, adjustment costs, non-wage amenities and information frictions. The evidence suggests that imperfect information about outside options in the local labor market can rationalize this result.

Keywords: Brazil, Judicial Decisions, Labor Earnings, Wages, Financial Distress, Outside Options

JEL Classification: G33, G20, K10