A Micro-Econometric Analysis of Alcohol Prohibition in India by Lupin Rahman Submitted to the Department of Economics, London School of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy at the UNIVERSITY OF LONDON September 2004 © The author hereby grants to University of London permission to reproduce and to distribute copies of this thesis document in whole or in part. Signature of Author .................................................................................................................... Department of Economics, London School of Economics August 6, 2004 Accepted by UMI Number: U198924 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U198924 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 A Micro-Econometric Analysis of Alcohol Prohibition in India by Lupin Rahman Submitted to the Department of Economics, London School of Economics on August 6, 2004, in partial fulfillment of the requirements for the degree of Doctor of Philosophy A bstract This thesis contributes to the understanding of alcohol prohibition by examining the causes and effects of prohibition policy in Indian states over 1957-2001. Chapter 2 examines the political economy of prohibition by using a state-level dataset to estimate the determinants of prohibition legislation. The analysis finds prohibition to be associated with the electoral cycle, legislature identity, lower relative strength of the alcohol industry, and the composition of state finances - in particular the share of central union excise. Chapter 3 focuses on the impact of prohibition on alcohol consumption using a series of cross sections of the National Sample Survey. Unit value analysis is conducted to estimate the impact on prices by alcohol group and uncover the demand and supply dynamics in the market. The relationship between alcohol, tobacco, and pan is examined using prohibition as an exogenous instrument, and the spill-over effects of policy on the demand for these goods are calculated. Prohibition is estimated to decrease alcohol participation by 26% with the effect varying by alcohol type and extent of prohibition. While both supply and demand shifts drive the decrease in consumption, the evidence suggests the deterrent effect of prohibition is significant. Tobacco and pan are found to be complements to alcohol and prohibition is associated with a fall in their demand. Chapter 4 focuses on the impact of prohibition on intrahousehold resource allocation by estimating Engel curves for broad categories of expenditure. The results indicate prohibition increased outlays for food and fuel with the magnitude of change being consistent with the reduction in alcohol estimated. The negative private and social effects of alcohol use are also examined. Prohibition led to a decrease in spurious liquor consumption and incidence of burglaries. However, it is associated with an increase in liver disease deaths and homicide rates. 2 Contents 1 An Overview of the Thesis 13 1.1 Introduction ............................................................................................................ 13 1.2 Background and Motivation ................................................................................ 14 1.2.1 History of Prohibition Policy ................................................................. 14 1.2.2 Prohibition and Other Policy Tools ........................................................ 18 1.3 Description of Thesis ............................................................................................. 19 1.4 Results and Contribution ................................................................................... 22 2 The Determinants of Government Paternalism: A Study of Alcohol Pro­ hibition in India 27 2.1 Introduction ............................................................................................................ 27 2.2 Background ............................................................................................................ 30 2.2.1 Prohibition Policy in In d ia .................................................................... 30 2.2.2 Alcohol Production and C onsum ption .................................................. 33 2.3 Methodological Framework................................................................................ 34 2.3.1 Theories of Government Regulation ..................................................... 34 2.3.2 Econometric Strategy ............................................................................. 37 2.4 Results ..................................................................................................................... 39 2.4.1 The Electoral C ycle ................................................................................ 40 2.4.2 Political Parties.......................................................................................... 41 2.4.3 Political Competition ............................................................................. 44 2.4.4 Legislature Identity ................................................................................ 45 3 2.4.5 Alcohol Lobby Power .............................................................................. 49 2.4.6 The Role of State F in an ces ..................................................................... 52 2.4.7 M im icry ....................................................................................................... 57 2.4.8 Negative effects of alcohol........................................................................ 58 2.4.9 Extensions ................................................................................................. 60 2.5 A nalysis .................................................................................................................. 62 2.6 Conclusion ............................................................................................................ 65 2.7 Appendix 1: Prohibition Legislation in Indian States, 1957-2001 ................ 66 2.8 Appendix 2: Data Appendix ........................................................................ 73 3 Alcohol Prohibition and Addictive Consumption 97 3.1 Introduction ............................................................................................................ 97 3.2 Background ............................................................................................................ 100 3.3 Data and Main Variables ................................................................................... 104 3.3.1 D a ta s e t....................................................................................................... 104 3.3.2 Measuring Alcohol Consum ption ............................................................ 106 3.3.3 Summary Statistics .................................................................................... 109 3.4 Basic M odel ............................................................................................................ 110 3.5 Empirical Specification ......................................................................................... 113 3.5.1 Observed Alcohol Demand ..................................................................... 113 3.5.2 Estimation of Censored Dependent Variab les ........................................ 114 3.5.3 Estimation Problem s ................................................................................. 116 3.5.4 Econometric Specification ........................................................................ 117 3.6 Prohibition and Alcohol C onsum ption .............................................................. 118 3.6.1 Pattern of Alcohol Consumption in In d i a ............................................. 118 3.6.2 Effect of Prohibition Policy on Alcohol Consumption .......................... 120 3.6.3 Incidence of Prohibition ........................................................................... 121 3.6.4 Robustness C hecks .................................................................................... 123 3.7 Unit Value A n a ly sis ............................................................................................ 126 3.8 Policy Mechanism ............................................................................................... 127 3.9 Alcohol and Addictive Goods Consum ption ...................................................... 129 4 3.10 Conclusion ............................................................................................................ 133 3.11 Appendix 1: Data Appendix ............................................................................. 135 4 Alcohol Prohibition and the Negative Effects of Alcohol Use 159 4.1 Introduction ............................................................................................................ 159 4.2 Background ...........................................................................................................