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Unbridled spirit: Illicit markets for bourbon whiskey

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  • Lennon, Conor
  • Shohfi, Tom
Abstract
The market for bourbon whiskey is booming. Demand is so great that bourbon aficionados regularly line up overnight for the chance to purchase a single bottle and high-end bourbons are allocated to consumers via lotteries. The prevalence of such non-price allocation mechanisms, however, leads to reselling in secondary markets. To characterize bourbon secondary markets, we first provide a rich description of how they function. We then use 2011 to 2019 whiskey auction data in a repeat sales regression framework to develop a novel price index for rare and vintage bourbons. Our repeat sales approach suggests that bourbon prices are increasing by about 9.1% per year over our sample period. We complement those estimates by developing a second price index using unique data from an illicit peer-to-peer secondary market that operated on a major social network between 2014 and 2017. Our estimates suggest that price increases are similar, at least during common sample periods, in our auction-house and peer-to-peer settings. We also examine how bourbon’s hedonic characteristics are related to secondary market prices and develop hedonic estimates of annual returns that range between 13.1% and 18.8%. While our sample period is relatively short, when examining bourbon’s potential as an alternative investment we find that the addition of bourbon can improve the risk-return ratio of typical stock/bond portfolios.

Suggested Citation

  • Lennon, Conor & Shohfi, Tom, 2021. "Unbridled spirit: Illicit markets for bourbon whiskey," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1025-1045.
    • Handle: RePEc:eee:jeborg:v:191:y:2021:i:c:p:1025-1045
    DOI: 10.1016/j.jebo.2021.09.045
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    Cited by:

    1. Fromentin, Vincent & Pecchioli, Bruno & Moroz, David, 2024. "Time-varying causality among whisky, wine, and equity markets," Finance Research Letters, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Bourbon; Whiskey; Alternative investment; Price index; Gray markets; Secondary;
    All these keywords.

    JEL classification:

    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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