Location: 368A Heady Hall

Description: Olivier Gergaud
"Anchored in the Past: Persistent Price Effects of Obsolete Vineyard Ratings in France"
Abstract: Although abundant evidence for anchoring in economic valuations has been produced in experimental settings, there have been relatively few studies testing for anchoring in actual markets. Thus, the extent to which anchoring affects market equilibria remains unclear. The champagne industry provides an ideal setting to test for the presence and persistence of anchoring effects in actual markets. For most of the 20th century, the price for wine grapes in the Champagne region of France was set each year by a centralized committee. Growers received a percentage of this price according to a vineyard quality rating system called the Echelle Des Crus (EDC). The EDC system was abolished in 1990 and grape prices are now determined in a market. We analyze data on grape and vineyard prices to determine whether current prices are anchored on past prices set under the discontinued EDC system. The econometric challenge is to separately identify anchoring effects from the effects of relevant information EDC era prices may convey about grape and vineyard quality. Our empirical approach controls or observable attributes of vineyards and time-invariant unobserved determinants of vineyard quality that may be revealed to market participants through EDC era prices. In addition, we use a novel instrumental variables strategy to mitigate confounding influences of time-varying unobservables. We instrument for the EDC rating using the average attributes of vineyards in neighboring villages, which are unlikely to be correlated with errors in prices because grape prices and rents from grape production depend on the characteristics of local vineyards. We find strong evidence that anchoring has large effects on prices for grapes and vineyards. We also examine whether the anchoring effect is diminishing over time as market participants come to rely more on objective information to determine prices. We find, instead, a persistent effect of the EDC many years after it became obsolete.

Contact Person: Wallace Huffman