An Anatomy of a Cartel: The National Industrial Recovery Act of 1933 and the Compliance Crisis of 1934

47 Pages Posted: 28 Feb 2008

See all articles by Peter G. Klein

Peter G. Klein

Baylor University - Hankamer School of Business; Norwegian School of Economics (NHH) - Department of Strategy and Management; Ludwig von Mises Institute

Jason E. Taylor

University of Virginia - Department of Economics

Date Written: February 26, 2008

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 analyis provides insight about cartel performance more generally.

JEL Classification: N42, N62, N82, Ll3, L41, L52

Suggested Citation

Klein, Peter G. and Taylor, Jason E., An Anatomy of a Cartel: The National Industrial Recovery Act of 1933 and the Compliance Crisis of 1934 (February 26, 2008). Available at SSRN: https://ssrn.com/abstract=1098373 or http://dx.doi.org/10.2139/ssrn.1098373

Peter G. Klein (Contact Author)

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States
254-710-4903 (Phone)

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Ludwig von Mises Institute ( email )

Auburn, AL
United States

Jason E. Taylor

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
181
Abstract Views
2,195
rank
180,422
PlumX Metrics