Booms, Busts, and Mismatch in Capital Markets: Evidence from the Offshore Oil and Gas Industry

Nicholas Vreugdenhil

Journal of Political Economy, 2026, vol. 134, issue 5, 1468 - 1505

Abstract: 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 that 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 I find that demand-smoothing policies are ineffective.

Date: 2026
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