Judge Bias in Labor Courts and Firm Performance

Does judge subjectivity in labor courts influence firm performance? We study the economic consequences of judge decisions by collecting information on about 150,000 Appeal court rulings, combined with administrative firm-level records covering the whole universe of French firms. The quasi-random assignment of judges to cases reveals that judge bias, defined as judge-specific differences on granting compen- sation for wrongful dismissal, has statistically significant effects on the survival and employment of small firms, especially among very small and low-performing ones. When compensation for wrongful dismissal is instrumented by judge bias, an increase in compensation of 1 percent of the payroll reduces employment growth by 5 percentage points after 3 years for those firms. Key words: Dismissal compensation, judge bias, firm survival, employment.