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

Author

Listed:
  • Bridgman, Benjamin

    (Bureau of Economic Analysis)

  • Qi, Shi

    (Florida State University)

  • Schmitz, James A.

    (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.

Suggested Citation

  • Bridgman, Benjamin & Qi, Shi & Schmitz, James A., 2015. "Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74," Staff Report 519, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:519
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    References listed on IDEAS

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    1. Fred Wilbur Powell, 1913. "Industrial Bounties and Rewards by American States," The Quarterly Journal of Economics, Oxford University Press, vol. 28(1), pages 191-208.
    2. Ellison, Sara Fisher & Mullin, Wallace P, 1995. "Economics and Politics: The Case of Sugar Tariff Reform," Journal of Law and Economics, University of Chicago Press, vol. 38(2), pages 335-366, October.
    3. Bridgman, Benjamin, 2015. "Competition, work rules and productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 136-149.
    4. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    5. P. T. Cherington, 1912. "State Bounties and the Beet-Sugar Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 26(2), pages 381-386.
    6. Rucker, Randal R & Thurman, Walter N & Sumner, Daniel A, 1995. "Restricting the Market for Quota: An Analysis of Tobacco Production Rights with Corroboration from Congressional Testimony," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 142-175, February.
    7. Lars-Hendrik Röller & Frode Steen, 2006. "On the Workings of a Cartel: Evidence from the Norwegian Cement Industry," American Economic Review, American Economic Association, vol. 96(1), pages 321-338, March.
    8. Libecap, Gary D., 1989. "The Political Economy of Crude Oil Cartelization in the United States, 1933–1972," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 833-855, December.
    9. Benjamin Bridgman & Michael Maio & James A. Schmitz, 2012. "What ever happened to the Puerto Rican sugar manufacturing industry?," Staff Report 477, Federal Reserve Bank of Minneapolis.
    10. James A. Schmitz Jr., 2005. "What Determines Productivity? Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 582-625, June.
    11. Alan J. Auerbach, 2010. "Public Finance in Practice and Theory ," CESifo Economic Studies, CESifo, vol. 56(1), pages 1-20, March.
    12. Jason E. Taylor, 2007. "Cartel Code Attributes and Cartel Performance: An Industry-Level Analysis of the National Industrial Recovery Act," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 597-624.
    13. Bridgman, Benjamin & Qi, Shi & Schmitz, James A., 2015. "Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74," Staff Report 519, Federal Reserve Bank of Minneapolis.
    14. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
    15. Benjamin Bridgman & Shi Qi & James A. Schmitz, 2009. "The economic performance of cartels: evidence from the New Deal U.S. sugar manufacturing cartel, 1934-74," Staff Report 437, Federal Reserve Bank of Minneapolis.
    16. Virgiliu Midrigan & Daniel Yi Xu, 2014. "Finance and Misallocation: Evidence from Plant-Level Data," American Economic Review, American Economic Association, vol. 104(2), pages 422-458, February.
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    Cited by:

    1. John Asker & Allan Collard-Wexler & Jan De Loecker, 2017. "Market Power, Production (Mis)Allocation and OPEC," NBER Working Papers 23801, National Bureau of Economic Research, Inc.
    2. Bridgman, Benjamin & Qi, Shi & Schmitz, James A., 2015. "Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74," Staff Report 519, Federal Reserve Bank of Minneapolis.
    3. Costinot, Arnaud & Donaldson, Dave, 2016. "How Large Are the Gains from Economic Integration? Theory and Evidence from U.S. Agriculture, 1880-1997," CEPR Discussion Papers 11712, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Cartels; Quota; Monopoly;

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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