The Impact of Reservation Prices on the Perceived Bias of Expert Appraisals of Fine Art

32 Pages Posted: 14 Jan 2009 Last revised: 13 Dec 2009

See all articles by Clare McAndrew

Clare McAndrew

Trinity College, Dublin

James L. Smith

affiliation not provided to SSRN

Rex Thompson

affiliation not provided to SSRN

Date Written: November 20, 2009

Abstract

We examine whether expert appraisals provided to bidders before major art auctions are unbiased indicators of value. Despite a strong grounding in theory, this aspect of optimal auction design has been frequently challenged in previous empirical research, particularly in the market for fine art. We adopt a valuation benchmark that incorporates sellers’ reserve prices as well as high bids, and recognize censoring of works that fail to make reserve. Although the auction houses never divulge reserve prices, we exploit the fact that they can be observed indirectly via their impact on buy-in rates. Using the set of French Impressionist paintings brought to auction from 1985 to 2001, we estimate the distribution of reserve prices, establish their link to a proper valuation benchmark, and isolate the selection bias due to bought-in works on the perceived market value of fine art works. After controlling for the impact of reservation prices, and considering all works brought to auction, we find no evidence of bias in the experts’ pre-sale estimates.

Keywords: censoring, auctions, biased appraisals, reservation price

JEL Classification: G11, G14, G12, C160, Z10

Suggested Citation

McAndrew, Clare and Smith, James L. and Thompson, Rex W., The Impact of Reservation Prices on the Perceived Bias of Expert Appraisals of Fine Art (November 20, 2009). Available at SSRN: https://ssrn.com/abstract=1327026 or http://dx.doi.org/10.2139/ssrn.1327026

Clare McAndrew

Trinity College, Dublin ( email )

2-3 College Green
Dublin, Leinster
Ireland

James L. Smith (Contact Author)

affiliation not provided to SSRN

Rex W. Thompson

affiliation not provided to SSRN

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