Terroir : The Rise of the French Regulatory State During the Third Republic

The French have an extensive system of food regulations that favors small, local, “traditional” producers. There is even a word for this Gallic preference for taking local geography seriously, terroir. We argue that the modern French concept of terroir, along with many of the anti-competitive regulations that emerged to support it at the beginning of the twentieth century, can be partly explained by the extensive system of high internal taxes on the trade in wine during the nineteenth century. These taxes, inherited from the Old Regime, were collected by both local and national governments and varied substantially across French departments. Our claim is that in many regions during the nineteenth century these local taxes were high enough to induce Alchian-Allen effects which biased consumption and production of wine towards the relatively expensive vins ordinaires sold by small local producers. This prevented cheaper, industrially produced, wine from the South from competing with local producers. We test this hypothesis using quasi-experimental variation in local taxes generated by a national policy change in 1901 which imposed a ceiling on local tax rates. We show that when wine taxes were forcibly lowered by the national government in 1901, more producers went out of business in regions that lowered their taxes more. We also show that the amount of wine transacted on formal markets, as opposed to being consumed “on the farm”, increased in regions which lowered their taxes more. Finally, we show that the net effect of lowering local wine taxes was an increase in the efficiency of wine production, as measured by output per hectare.