The Substitution Effect of Chinese Anti-Corruption “Alcohol Ban”

Abstract

Over the past decade, China has intensified its anti-corruption efforts. On 21 December 2012, “Alcohol Consumption Prohibition at Military Functions” was announced, which made the consumption of high-end Chinese Baijiu decline. We apply principal-agent theory to analyze the potential substitution effect, and then, we apply the difference in difference model and event study method to test the substitution effect between Baijiu and foreign alcohol by using macro- and micro-data. The results indicate that, in response to the “Alcohol Ban”, the Chinese consume more imported wine and more expensive foreign spirits. What is more, the CARs of high-end alcohol companies listed on the U.S. stock market significantly increase. We conclude that there exist substitution effects after the “Alcohol Ban”, which is necessary for the government to comprehensively investigate when formulating policies, because it may partially weaken the effectiveness of the policy.