An anatomy of a cartel: The national industrial recovery act of 1933 and the compliance crisis of 1934

Jason E. Taylor, Peter G. Klein

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

14 Scopus citations

Abstract

This paper explores the nature and causes of the cartel compliance crisis that befell the National Industrial Recovery Act (NIRA) one year after its passage in 1933. We employ a simple game-theoretic model of the NIRA's cartel enforcement mechanism to show that the compliance crisis can largely be explained by changes in expectations, rather than a change in enforcement policy. Specifically, firms initially overestimated the probability that defection would be met with sanction by the cartel's enabling body, the National Recovery Administration - including a consumer boycott resulting from loss of the patriotic Blue Eagle emblem - and complied with the industry cartel rules. As these expectations were correctly adjusted downward, cartel compliance was lost. We support this hypothesis empirically with industry-level panel data showing how output and wage rates varied according to consumer confidence in the Blue Eagle. The analysis provides insight about cartel performance more generally.

Original languageEnglish
Title of host publicationResearch in Economic History
EditorsAlexander Field, William Sundstrom, Gregory Clark
Pages235-271
Number of pages37
DOIs
StatePublished - 2008

Publication series

NameResearch in Economic History
Volume26
ISSN (Print)0363-3268

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