Peer Effects in the Scotch Whisky Industry: A Test of Three Selection Mechanisms

Abstract

The question facing managers when confronted with irreversible investment decisions is what framework they should choose to assess risks? Research suggests that managers may forgo the cognitive effort of building predictive models in favour of doing what their industry peers do. There is extensive empirical support for this so-called “peer effect”. However, the peers in peer-effect studies are usually identified by the researchers before testing the effect. In this paper, we do not identify peers but focus on alternative criteria that firms in the same industry may use to select peers. We argue that the literature points to three possible peer selection mechanisms: Regional cluster identity, similar resource size, and product market rivalry. We test these mechanisms using data on capacity expansion decisions by 117 distilleries from the Scotch Whisky industry from 1950-2010. We find that regional cluster identity and resource size are used to identify peers, but not product market competition.