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

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