Academic journal article Economic Inquiry

Reputation, Price, and Death: An Empirical Analysis of Art Price Formation

Academic journal article Economic Inquiry

Reputation, Price, and Death: An Empirical Analysis of Art Price Formation

Article excerpt

I. INTRODUCTION

Art prices are often claimed to substantially increase when the artist dies. These claims appear to be largely based on anecdotal evidence. They are promulgated by hearsay and sometimes cleverly insinuated by art dealers who attempt to convince naive customers that it is justified to mark up the artwork of recently deceased artists. This study provides a theory-guided empirical analysis of the so-called "death effect" on art prices. The analysis employs hedonic price regressions and makes use of a dataset which exceeds the sample size of traditional studies in cultural economics by an order of magnitude, thereby shedding a new light on previous investigations of art price formation.

Even though the literature on art auctions, art price indices, and rates of return in the visual arts market is by now quite voluminous (see, respectively, Ashenfelter and Graddy 2006; Ginsburgh, Mei, and Moses 2006; Frey and Eichenberger 1995), the death effect has not received much attention so far. To be sure, there are a few empirical studies which allow for a death effect, but these studies do so in a rather cursory and off-hand manner by merely including in their regressions a dummy variable that distinguishes between works of art created by living and late artists (see, e.g., Agnello 2002; Worthington and Higgs 2006).

The first investigation that has squarely addressed death-induced changes in art prices is by Ekelund, Ressler, and Watson (2000). These authors go some way in providing a theoretical underpinning of the death effect by pointing out that artists produce durable goods under market conditions of monopolistic competition. Thus, given rational actors in the art market, the Coase Conjecture applies (Coase 1972): even though artists have, in principle, some discretion in setting prices, they cannot exert market power because they are unable to credibly commit to not lowering their prices in the future by spoiling the market with an inflationary increase in production. During an artist's lifetime, prices will therefore settle well below the monopoly price. Death, of course, is the ultimate device to commit to discontinuing production. Art prices thus increase when the artist dies because her oeuvre all of a sudden becomes scarcer than originally anticipated. After having laid this theoretical foundation, Ekelund, Ressler, and Watson proceed to empirically identify the death effect with the help of a hedonic price regression. Their data consists of a panel of auction records relating to the work of 21 Latin American artists who died near or during the observation period (1977-1996). The prices are shown to peak in the years immediately following an artist's death, thus lending support to the existence of a death effect.

From a theoretical point of view, the main concern with this pioneering analysis relates to the artists' age at death. Since the probability of dying increases with age, the information of an old artist's death is not very surprising and should therefore already be largely reflected in the price, implying a small death effect. The death of an old artist, moreover, causes a relatively small reduction in the anticipated size of her oeuvre which, again, translates into a relatively small price increase when her death is made public. Assuming rational expectations, one would therefore expect the death effect to decrease with the artist's age at death. A formal rendering of this argument is shown by Itaya and Ursprung (2008) who investigate the death effect in an infinite-horizon dynamic general equilibrium setting. It therefore stands to reason that the death effect depends on the age at death. Neglecting this relationship in empirical investigations may, of course, give rise to a seriously misspecified econometric model.

A recent study by Maddison and Jul-Pedersen (2008) acknowledges that the prices of an artist's works should depend on the expected total supply which, in turn, depends on the artist's conditional life expectancy at the time of sale. …

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