On the Causality, Cause, and Consequence of Returns to Organizational Status: Evidence from the Grands Crus Classés of the Médoc

Abstract

This paper addresses the recent debate about the causality, cause, and consequence of returns to status on the organizational level. I exploit the grand cru classification of chateaux of the Medoc created in 1855 as an unambiguous and exogenous status signal. I study its effect on wine prices and the incentive to invest in quality over a period of time during which information about producer and product quality has become increasingly munificent. As for the causality of status effects, I find evidence for causal returns to organizational status, but these returns are substantially overestimated if quality and reputation are not accurately controlled on the product level. As for the cause of status effects, I find that uncertainty is not a necessary condition and the taste for high-status products is a sufficient condition for returns to organizational status. As for the consequence of status effects, I find that higher-status producers’ greater incentives to invest in quality are insufficient to enforce a separating equilibrium in producers’ quality choices. The study cautions that causality claims in the status literature hinge upon proper identification, that returns to status can have alternative root causes, and that status hierarchies need not enshrine the quality hierarchy among producers.