Endogenous Rigidities and Capital Misallocation: Evidence from Containerships

We investigate how endogenous rigidities inhibit physical capital reallocation. We focus on the role of contract duration - a classic example of an adjustment rigidity. We argue when agents sign longer contracts in booms when markets are thin, they generate a contracting externality which further amplifies thinness and impedes the adjustment of markets to shocks. We develop a framework with booms and busts where agents search and choose match duration. Applying the framework to the containership leasing market, we find substantial misallocation from endogenous rigidities, particularly in the transition after a crash. We also quantify implications for designing industrial policy.