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Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74

Benjamin Bridgman (), Shi Qi and James Schmitz ()

No 519, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: The idea that cartels might reduce industry productivity by misallocating production from high to low productivity producers is as old as Adam. However, the study of the economic consequences of cartels has almost exclusively focused on the losses from higher prices (i.e., Harberger triangles). Yet, as the old idea suggests, we show that the rules for quotas and side payments in the New Deal sugar cartel led to significant misallocation of production. The resulting productivity declines essentially destroyed the entire cartel profit. The magnitude of the deadweight losses (relative to value added) was large: we estimate a lower bound for the losses equal to 25 percent and 42 percent in the beet and cane industries, respecttively.

Keywords: Cartels; Quota; Monopoly (search for similar items in EconPapers)
JEL-codes: L6 L00 L43 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2015-10-31
New Economics Papers: this item is included in nep-com, nep-eff and nep-ind
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