Booms, Busts, and Mismatch in Capital Markets: Evidence from the Offshore Oil and Gas Industry
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.
- DOI
- 10.1086/739827
- Volume
- 134 (5)
- Pages
- 1468-1505
- Language
- en
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