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Spatial Economic Analysis of Liquor Privatization in Washington State

  • Author(s): LoPiccalo, Katherine
  • Advisor(s): Dobkin, Carlos
  • et al.
Abstract

Alcohol is both a dangerous drug and an economically significant good. State regulation of alcohol is motivated by an emphasis on public safety and efficient distribution of the product. The dual nature of alcohol policy in the post-Prohibition Era has been characterized by what can only be classified by anti-competitive regulations, including: policies that require distributors to charge the same "delivered" price to all retailers, regardless of actual delivery costs; policies that require alcohol distributors to charge uniform prices to all retailers; bans on volume discounts for beer and wine sales; franchise protection laws; policies granting wholesalers specific geographic territories; prohibitions on central warehousing of alcohol by retailers; policies that require distributors and producers to post their prices in advance and/or share those prices with rivals; and minimum mark-ups on sales from producers to wholesalers and from distributors to retailers, among others. Examination of state variation in regulation of alcohol markets is therefore an important area of applied microeconomic research.

The primary context for my analysis is liquor privatization in the State of Washington. On Nov. 8, 2011, Washington residents voted to end the state's nearly 80-year monopoly on the retail sale and distribution of liquor within the state. The first-order effect of the new private liquor market was higher prices - a mostly unanticipated outcome of new fees that were imposed as part of privatization on retailers and distributors.

The first chapter uses store-level data on liquor sales in Oregon to estimate the effect of higher prices in Washington on the tendency for consumers to cross the border to buy cheaper liquor. I calculate the impact of ad-valorem taxes on tax avoidance using variation in Oregon stores' proximity to the Washington-Oregon (WA-OR) border. The empirical methodology benefits from 1) detailed location data on Oregon liquor stores and border crossings, 2) uniform pricing of liquor in Oregon, and 3) detailed sales for each of the 250 stores licensed to sell liquor in Oregon. I find that the stores closest to the WA-OR border experienced an additional 21 percent increase in sales relative to interior stores.

The second chapter examines the effect of liquor store entry on crime in the City of Seattle following liquor privatization. Previous research has linked the commission of violent crime and alcohol, although the causal relationship is ambiguous. I take advantage of precisely geocoded 911 police response data to measure the impact that store entry has on crime. Little evidence is found for an increase in the weekly number of calls for service for potentially "alcohol-related offenses", such as assaults, robbery, nuisance violations, social disorder more broadly defined, and driving while under the influence. Event study analysis and spatial analysis at the census block group level confirm the main results.

In the third chapter, I examine the outcome of Washington's public auction of the retail liquor rights associated with its former state-run stores. Privatization mandated that Washington auction off these rights ahead of privatization. Overall, I find winning bidders paid 40 percent more for the retail rights to stores closest to Oregon and Idaho border crossings. This outcome, as well as the fact that the State of Washington made $31 million from the public auction, suggests significant optimism on the part of entering firms. However, higher liquor prices from new fees have significantly reduced the value of owning a liquor store in Washington under privatization.

To my knowledge there exists no systematic study of the economic impact of state regulation of alcohol. I believe there is scope for research which identifies the components which influence consumer and firm behavior in alcohol markets. Broadly speaking, such insights would be beneficial in evaluating public policies for a wide range of decision-making environments. From a social welfare perspective, the highly regulated alcohol industry in the U.S. has been shown to generate inefficiency, welfare loss, and higher consumer prices.

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