International trade, quality sorting and trade costs: the case of Cognac

This paper tests empirically the validity of the Alchian and Allen effect stipulating that per-unit trade costs increase the relative demand for higher-quality goods. We use an original dataset of French Cognac exports by quality designations and estimate the impact of trade costs on the share of high quality Cognac. The definition of quality, based on the minimum time in oak of the youngest eau-de-vie (wine brandy) used in creating the blend, is objective and time-invariant, which makes the case of Cognac particularly relevant to analyze the impact of different trade costs on its quality mix. We investigate both the impact of distance and customs duties on Cognac’s quality mix, from 1996 to 2013, and the impact of a variation in trade costs, brought by the containerization of shipping, between 1969 and 2013. Our results confirm the presence of the Alchian and Allen effect.