In Vino Veritas: The Effects of Different Management Configurations in German Viniculture

Abstract

Different management configurations have distinct performance effects. In particular, this is examined for vine-growing estates in Germany. For several reasons managers will prefer higher quality over quantity, thus producing better wines at higher prices in lower volume than self-managing owners do. Conversely, members of cooperatives have diverse incentives to sell more and cheaper bottles of lower quality than independent winegrowers. These hypotheses are theoretically derived and empirically tested as well as confirmed for German viniculture.

Keywords:

• cooperative
• quality preference
• viniculture
• vineyard
• wine

Acknowledgements

Many thanks to Bernd Frick and Torsten Lüth. Some findings of this paper have been published before in German in Dilger (2005).

Notes

See Scott Morton and Podolny (2002). The relationship between quantity and quality has been reversed here, however, because winegrowers have to decide at the beginning of each season how much of which quality they want to cultivate whereas the prices are selected at the end of the season or even later.

If the owner has no such preferences, then g(s) = 0 for all s. She might be interested in high quality, nevertheless, but then only as an end to get high prices and thereby profits.

See Ross (1973) or Holmström (1979).

Combris et al. (1997) do not find a significant relationship between quality and price, which is mostly influenced by ‘objective’ characteristics according to them, whereas Miller et al. (2007) show such a relationship in a setting of imperfect competition and asymmetric information comparable to this paper. See also Gibbs et al. (2009).

See Benjamin and Podolny (1999) for the importance of status in the wine industry.

Without asymmetric information the owner can easily set incentives for the manager in a way that he does exactly what she wants.

For still another explanation with a duopoly model, see Hoffmann (2005).

See Olmos (2008) for problems of observing and contracting the grape quality.

See Hanf and Schweickert (2007) for the management problems if very heterogeneous members remain in a cooperative.

See Sälzer (2000) and Gurrath (2001).

1 hectare (ha) is nearly 2.5 acres.

The size and membership do not change in the short run, the location does not change even in the long run, whereas the quantity of wine may be different every year, but this information is available only once.

However, not every vineyard is included in each year.

See Borooah (2002) or Greene (2003).

Frick (2004) finds the same (higher prices and quality by managers compared to owners, while he does not estimate the quantity) by using the same dataset and some other estimation procedures. However, he draws another or even opposite conclusion, namely that managers perform better than owners due to (unobserved) higher human capital.

See also Schamel (2009) for analogous empirical results from another German dataset.

The individual members of the cooperative have certainly much smaller estates. The mean size of all vineyards in Germany is only about 1.4 ha (see Sälzer, 2000).

However, this influence seems to be quite limited according to Reuter (2009).