An Empirical Analysis of the Effect of Sub-Divisions of American Viticultural Areas on Wine Prices: A Hedonic Study of Napa Valley

Abstract

American Viticultural Areas (AVAs) are descriptors of where wine grapes are grown‎ that are designed to capture qualities unique to a wine and to influence its price. Sub-AVAs are sub-divisions of well-known AVAs designed to accomplish the same thing. In this paper I study the impact of the Napa Valley Sub-AVA system on the pricing and rating of Napa Valley wines. The analysis utilizes a primary hedonic pricing model to isolate both the individual Sub-AVA’s price effect and the system’s cumulative price effect. The primary analysis is coupled with a reduced form regression and a ratings based model to further study the direct and indirect Sub-AVA effects. This study uses a unique, hand collected dataset of 5,017 Napa Valley wines reviewed by The Connoisseurs’ Guide to California Wine over the 10-year period from 2004-2013. Building on previous academic work, this approach adds to existing literature by helping resolve differing academic views on the effectiveness of the Sub-AVA system, particularly in an area as critical to the American wine industry as Napa Valley. This research finds that the Napa Valley Sub-AVA system is effective, with nine of the fourteen researched Sub-AVAs predicting significant positive price effects, and only one Sub-AVA a significant negative price effect. Furthermore, the cumulative system predicts a positive price effect significant at the 1% level. These results indicate that Sub-AVAs deliver a far more substantial price effect than previous literature has suggested, an important finding for both producers and investors.