The economics of alcohol: essays on consumption, taxation, regulation and contracts.

Abstract

The Economics of Alcohol: Essays on Consumption, Taxation, Regulation and ContractsKoen DeconinckPhD SummaryThis dissertation contains five chapters discussing some of the economic aspects of alcohol consumption and production. Following a concise introductory chapter, the second chapter, Peer Effects in Alcohol Consumption: Evidence from Russia, contributes to the literature on the determinants of alcohol consumption by studying the importance of social influence in the individual decision to start drinking beer in Russia. Between 1996 and 2007, beer consumption in Russia grew strongly from about 15 liters per capita to 80 liters per capita, and beer has become the most important alcoholic beverage in Russia, overtaking vodka. Our empirical analysis, using individual-level panel data from the Russian Longitudinal Monitoring Survey, indicates that peer effects played an important role in the spread of beer consumption. By contrast, economic variables such as prices or incomes probably played only a minor role. These results may hold important policy implications given the widespread problem of alcoholism in Russia.The third and fourth chapter analyze regulatory issues. Chapter 3, The Economics of Planting Rights in Wine Production, presents the first economic model of the so-called planting rights system used to restrict the growth of the total area of vineyards in the European Union, home to half of the world s vineyards. The planting rights system forbids any new plantings of vineyards in the European Union except when a planting right has been obtained from a government reserve or from a former vineyard owner who has grubbed up his vines. This cap-and-trade system, which has been in place since the 1970s, is subject to large differences in implementation in the different Member States of the EU. We develop a theoretical model analyzing the welfare and distributional effects of the planting rights system, as well as of the differences in implementation. Our results show the importance of distinguishing between land owners, planting rights owners and wine producers to study the distributional consequences of (a liberalization of) the planting rights system. In the fourth chapter, The Political Economy of Geographical Indications, we contribute to the economic analysis of geographical indications (GIs) government-backed collective labels to certify the geographical origins of a product, such as Champagne. Government regulation stipulates the geographical area which can identify its products with the GI. An increase in the total area of the GI region can have three effects. First, production increases and hence prices of the product would decrease. Second, certain fixed costs (such as marketing) can be spread over a larger production volume, thus reducing the costs for individual producers. Third, the actual or perceived quality of the product may decrease, whether because of a decline in quality as land with less suitable terroir is added, or because of reputational effects. We derive the size of thesocially optimal GI region and then proceed with a political economy analysis to study how a government subject to lobbying will set the size of the GI area. Interestingly, our analysis shows that if producers can influence decision-making, the political outcome may either be too small or too large from a social welfare perspective.Chapter 5, Tied Houses: An Economic Analysis of Brewery-Pub Contracts, studies the contracts between publicans and brewers. In several countries (including Belgium) a large number of pubs have exclusivity agreements (or ties ) with brewers. This is often the case for pubs which the publican rents from the brewer, or in pubs where the brewer has made financial or material investments on behalf of the publican. These contracts have attracted a great deal of criticism from publicans, who complain about paying unreasonably high wholesale prices for beer compared to pubs which are free of tie. Our chapter presents an economic analysis of the contracts between brewers and publicans to answer two questions. The first question is how the terms of contract are determined and in particular, why contracts for rental pubs typically have a low rent but a high wholesale price, even though this high wholesale price generates inefficiencies. The second question is why wholesale prices differ between tied and free pubs. Our analysis emphasizes that publicans are typically risk-averse (inducing brewers to use the wholesale price rather than a fixed payment to extract surplus) and credit-constrained, with publicans sorting into different contracts depending on their initial wealth. As our analysis shows, publicans who bear only a small part of the total investment in a pub will face a higher wholesale price since their own outside options are limited, the brewer s opportunity costs are higher, and the brewer has more bargaining power. The implication of our analysis for current policy debates is that credit constraints need to be taken into account in analyzing price differentials, and that it is important to distinguish between opportunity costs and bargaining power as determinants of the wholesale price.Chapter 6, How Beer Created Belgium: The Contribution of Beer Taxes to Dutch War Finance During the Dutch Revolt, illustrates the development of public finance and state power by analyzing the contribution of beer taxes to war finance during the Dutch Revolt (1566-1648). Specifically, we show that fiscal revenues from beer taxes gave the present-day Netherlands the military power to break away from the Spanish-occupied Low Countries in the course of the Dutch Revolt (1566-1648), leaving the territory of present-day Belgium behind as the remainder of the Spanish Low Countries. The border established by this separation still forms the division between Belgium and the Netherlands. The outcome of the Revolt was unusual, in that a small rebellious region eventually prevailed over the mighty Spanish Empire. The explanation for this remarkable outcome lies in a combination of developments in war technology and the extraordinary capacity of the Dutch to finance the war. Because of technological developments and innovations in strategy and tactics, warfare during the Dutch Revolt was an increasingly capital-intensive undertaking. The capacity to finance war expenditures therefore became of paramount importance. The Spanish army in the Low Countries was constantly short on funds, which led to frequent payment arrears among its troops. As a result, demoralization, desertion and mutinies undermined the Spanish position. The Dutch, on the other hand, could count on a superior system of public finance to finance war expenditures. As we document in this chapter, a substantial part of the Dutch taxation system consisted of taxes on beer. In fact, the excise tax on beer was the single largest component of government revenues in Holland, the leading province in the Dutch Republic. Hence, beer taxes played a crucial role in financing the Dutch Revolt, and thus in the separation of the Low Countries and the determination of the present-day border between Belgium and the Netherlands. The surprisingly large contribution of beer taxes can be explained by the combination of the importance of beer in daily consumption patterns in early modern times and an efficient enforcement of the beer tax.status: publishe