Human Capital Reallocation Across Firms: Evidence from Idiosyncratic Shocks

Abstract

We study human capital reallocation following firm-specific idiosyncratic shocks. Theory
offers diverging predictions as to whether human capital gets reallocated to its most
productive use following these shocks. To empirically test these predictions, we focus
on relegation battles in the English Premier League. This setting offers well identified
idiosyncratic shocks as well as both individual-level and firm-level productivity metrics.
We find that human capital exits firms after a negative idiosyncratic shock. Specifically,
we find that more productive players move to more productive clubs and maintain their
long-term productivity. They get replaced with lower productivity players. Overall, our
results show that in a setting with highly transferable skills, idiosyncratic shocks lead to
a reallocation of human capital that moves an industry towards a better overall match
between individual-level and firm-level productivity.

Keywords: Idiosyncratic shock, human capital, reallocation, productivity, English Premier League, relegation

JEL Classification: G31, G32, G33, J24