WINE GRAPES OF WRATH: THE ECONOMIC EFFECTS OF PROHIBITION IN THE UNITED STATES

Abstract

This thesis will investigate the effects of Prohibition on the United States wine industry through an analysis of the changes in grape production and grape quality in the periods immediately before, during, and after Prohibition, from 1913 to 1940. OLS regressions of log price on log quantity of grapes produced in California in this era reveal a short run positive demand shock during Prohibition, which was sustained into the long run. This paper offers an explanation for the sustained long run increase in the demand for grapes through the “habit persistence theory”, due to lagged effects of habit formation on consumption. Moreover, the increased production of grapes during Prohibition may have led to adverse outcomes on the overall quality of grapes produced in the U.S., as shown in regressions of quantity produced on the average estimated quality of grapes calculated from historic climate conditions and coefficients from the Bordeaux equation. Prohibition’s impact on the U.S. wine industry was nuanced in nature, and with far-reaching outcomes that continued on beyond the years of Prohibition itself.