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

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.