It is commonly believed that employees of failed firms are disadvantaged in their future efforts to secure employment since they are tarnished due to their former employer’s failure. In contrast, we advance a new model of post-failure employment dynamics where we argue that employees of failed firms are not only immured from tarnishing in the eyes of their future employers but also gain an advantage by representing untethered bundles of resources unleashed onto the labor market. Additionally, employers value such displaced employees more if they are specialized. We test our model in the U.S. legal industry by exploiting unexpected law firm failures as a quasi-experimental setup using difference-in-difference estimation and employing a matched sample design. The results lend support to our proposed theoretical predictions.
