Judge Bias in Labor Courts and Firm Performance

Abstract

This paper documents the existence of judge-specific differences on granting compensation for wrongful dismissal and shows that their consequences are different for small low-performing firms than for other firms. Pro-worker judge bias reduces job creation for all firms, increases the destruction of permanent jobs in small and low-performing firms but reduces it in large high-performing firms. Pro-worker bias reduces employment and survival for small and low-performing firms but has no significant effects on these outcomes for the other firms. The probability that permanent incumbent workers keep their job in firms judged by a pro-worker judge increases in large and high-performing firms, while it decreases in small, poorly performing firms.