The Labor Effects of Pro-labor Bias in Bankruptcy
Judicial decisions in bankruptcy are often influenced by the goal of preserving employment. Using the text of judicial decisions and the random assignment of cases across courts in the state of São Paulo in Brazil, we construct a novel court-level measure of pro-labor bias and study its effect on labor market outcomes. Employees of distressed firms assigned to high pro-labor courts are more likely to stay with their employer; however, they experience a 4.5% decline in earnings. This effect is driven by wage adjustments, it is stronger for workers with better outside options, and concentrated in periods of economic expansion.
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