Elsevier

European Economic Review

Volume 138, September 2021, 103824
European Economic Review

How big is the “lemons” problem? Historical evidence from French wines

https://doi.org/10.1016/j.euroecorev.2021.103824Get rights and content

Abstract

This paper provides empirical evidence on the welfare losses associated with asymmetric information about product quality in a competitive market. When consumers cannot observe product characteristics at the time of purchase, atomistic producers have no incentive to supply costly quality. We compare wine prices across administrative districts around the enactment of historic regulations aimed at certifying the quality of more than 250 French appellation wines to identify welfare losses from asymmetric information. We estimate that these losses amount to more than 7% of total market value, suggesting an important role for credible certification schemes.

Section snippets

Historical and institutional background

The practice of using geographical names to identify fine wines long predates any attempt to officially regulate appellations. Fraud became widespread in the French wine market during the acute production shortage of the late 19th century, which generated strong incentives to increase production while lowering quality.15

A model of the wine market

This section develops a stylized model of the wine market to illustrate a key mechanism through which AOC recognition could affect wine prices, and discusses how available data can be leveraged to recover welfare effects. The model assumes that wine producers respond to AOC recognition by engaging in quality enhancement. Appendix B discusses a complementary mechanism whereby quality does not change but a share of wines previously sold under appellation is redirected towards the ordinary wine

Data

Our dataset combines several sources. We obtain departmental average wine prices, areas in vineyards, and wine production from France’s Statistique agricole annuelle (SAA), an agricultural yearbook published by the Ministry of Agriculture and only available in print for the historical period. We focus on the period 1907–1969. This time window excludes the period, starting in the 1860s, when France’s vineyards were destroyed by phylloxera. It further excludes an ensuing period of generalized

Price analysis

We begin with a discussion of our identification strategy. We then present our empirical findings, including the effect of AOC recognition on the average wine price and its interpretability in terms of quality improvements.

Costs and welfare effects

At the end of our study period, the overall share of vineyards eligible for at least one AOC was 32% across all French departments. Together with an estimated effect of AOC recognition of 44%, this figure implies a relative increase in market value of about 14%. As explained in Section 2, under the interpretation that the effect was due to quality improvements, the (absolute) increase in market value provides a lower bound to the increase in gross welfare.

To obtain a lower bound of the effect

Conclusion

We assemble empirical evidence suggesting that the quality of French wines sold under appellation prior to the 1935 AOC law was below the social optimum, and that the reform allowed producers to profitably adopt quality-enhancing practices. Using a panel approach, we first estimate that the average wine price increased by 44% in departments whose vineyards became eligible for AOC recognition.

Although treated departments are different from control departments in the sense that they benefit from

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  • Cited by (0)

    We thank Olivier Allais, Orley Ashenfelter, Jean-Marc Bourgeon, Claire Chambolle, Guillaume Daudin, Thibault Fally, Pierre Fleckinger, Jonathan Goupille-Lebret, Hervé Guyomard, Laurent Linnemer, Kevin Novan, Ashish Shenoy, Stéphane Turolla, Bertrand Villeneuve, Michael Visser, as well as seminar participants at CREST, Université Paris-Dauphine, GATE-ENS Lyon, GAEL, INRA (ALISS, EcoPub and SMART-LERECO units), Iowa State University, Purdue University, University of Alberta, University of California Davis, University of California Berkeley, the 2019 EEA-ESEM Conference, the 68th Congress of the French Economic Association, the 2019 ADRES Conference, the 10th TSE Conference on “IO and the Food Industry,” and the 13th AAWE Conference. We are also grateful to Florian Humbert, Martin Baussier, and François Roncin for their insights regarding the historical delimitation of French wine appellations. This article benefited from a fellowship awarded to Pierre Mérel at the Paris Institute for Advanced Study (France), with the financial support of the French State, programme “Investissements d’avenir” managed by the Agence Nationale de la Recherche (ANR-11-LABX-0027-01 Labex RFIEA+). It also benefited from a grant awarded to Ariel Ortiz-Bobea by the Cornell Center for Social Sciences (CCSS), and from several grants awarded to Emmanuel Paroissien by the RITM unit at the Université Paris-Saclay and the SMART-LERECO and CESAER units at INRAE .

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