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

Jason E. Taylor and Peter G. Klein

A chapter in Research in Economic History, 2008, pp 235-271 from Emerald Group Publishing Limited

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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rehizz:s0363-3268(08)26005-2

DOI: 10.1016/S0363-3268(08)26005-2

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