Explaining the Art Market's Thefts, Frauds, and Forgeries (And Why the Art Market Does Not Seem to Care)

Abstract

Based upon a series of interviews with art market experts, this article identifies and answers a significant, yet previously unexplored economics puzzle affecting the art market. Economic theory suggests that markets generally produce efficiency and social wealth, but when they fail, most actors should prefer remedial measures to an inefficient status quo. The art market currently is, and has been, plagued by fraud, thefts, forgeries, and market failure — a state of affairs that the current legal framework has only made worse. Despite this, the art market seems to adamantly — and puzzlingly — defend its traditional business culture, rejecting all attempts to remedy inefficiencies. In other words, why has the art industry remained stable, yet fraught with market failure? Should we not expect those who have been adversely affected to campaign for change?

The research herein adopts a law and economics approach, finding that reliable product information is the lifeblood of efficient markets, yet the unique nature of art encourages dealers, sellers, and experts, among others, to withhold or conceal important market information. This dynamic prevents prospective buyers from knowing whether an expensive work is worth the value for which it was sold, leading to an inefficient distribution of resources. Few actors have sought to change this, however, because the economic nature of art produces a special conflict of interest. Many buyers expect art to appreciate in value and thus assume that they will probably resell the work at a higher price, causing buyers to prefer an art market that favors the sellers. This finding suggests that efficient markets require a buyers and sellers to be sufficiently adverse or incur stark inefficiencies.

Keywords: art market, law and economics, transaction