ALCOHOL, DEFAULTS, AND FINANCIAL DECISIONS: EVIDENCE FROM A NATURAL EXPERIMENT IN FINLAND

Abstract

Numerous studies have found the health and social harms of alcohol. However, the effects of alcohol on financial outcomes are less known. This study examines the causality between alcohol and payment default, investment, risk aversion, and poverty. In January 2004, Finland abolished the quotas of travelers’ alcohol import from European Union countries, and four months later, Finland’s neighboring country, Estonia, where the alcohol price is less than a half of that in Finland, joined the EU. This study shows that Finnish provinces closer to Estonia experienced a greater increase in alcohol consumption after the policy shocks. Consequently, the increasing availability of cheap alcohol increased individual payment default probability and default amount; it decreased investments in the financial market and raised risk aversion; and it reduced the probability of a tenant to own a house. We indicate that there are no other significant related impacts of Estonia’s EU accession to Finland.