How efficiently do markets reallocate capital in booms and busts? Using a novel dataset of offshore drilling contracts I examine the role of matching in shaping industry reallocation. Oil companies search and match with capital (rigs) in a decentralized market. I find oil and gas booms increase the option value of searching which leads agents to avoid bad matches, reducing mismatch through a sorting effect. I provide an identification strategy to disentangle unobserved demand changes from the sorting effect. Estimating a model, I find substantial benefits to the sorting effect and an intermediary but that demand smoothing policies are ineffective. ∗Department of Economics, Arizona State University. Email: [email protected]. Thank you to Robert Porter, Mar Reguant, and Gaston Illanes for their encouragement and advice. I would also like to thank Gaurab Aryal, Vivek Bhattacharya, Igal Hendel, Ken Hendricks, Bill Rogerson, Mark Satterthwaite, and Yuta Toyama for useful comments and suggestions. I thank seminar participants at ASU, Cornell, Duke Fuqua, IIOC, LSE (Management), Microsoft Research, Monash University, NYU, NYU (Stern), Penn State, UCL, and U Maryland AREC. This research was supported by a grant from the Center for the Study of Industrial Organization at Northwestern. I acknowledge IHS and Rigzone for providing data.

We evaluate the efficiency of dynamic linked environmental regulation. Linked regulation allows inspectors who uncover violations at one plant to increase future enforcement at other plants that share a common owner. When compliance costs are correlated, regulators can then target scarce enforcement resources towards bad actors without inspecting everyone. We develop an empirical framework of dynamic moral hazard under linked regulation that allows for large portfolios of plants and for choices to be interdependent within the portfolio of plants and across time. Using the framework we evaluate a linked regulation scheme in Texas and find that linked regulation performs substantially better than both unlinked regulation and untargeted regulation. We test two alternative theoretical mechanisms that underpin the benefit—a “firm-wide moral hazard mechanism” and a “correlated targeting mechanism”—and find that a large share of the value of linked regulation is due to the former.