Unbridled spirit: Illicit markets for bourbon whiskey

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.