In Art We Trust

Abstract

While trust is the cornerstone of any market’s functioning, it is of particular importance in markets that are unregulated, illiquid, and opaque, such as the art market. This study examines the role of authenticity, as captured by provenance information in auction catalogs, on the probability of auctioned oil paintings, watercolors, and prints being sold, their price formation, and returns. Auction catalogs include four authenticity dimensions: pedigree (ownership “blockchain,” descendance information, type of past owners, such as renowned collectors, and past sales records); exhibition history (e.g., in famous museums or galleries); literature coverage (e.g. in catalogues raisonnés or authoritative press), and certification (e.g. artist’s physical testimonial, experts’ opinions). We find that trust, proxied by provenance information, increases the probability of a work being sold by up to 4%, leads to hammer price premiums up to 54%, and increases annualized returns by 5% to 16%. To address potential endogeneity problems between the provision of provenance, and past prices/price expectations, we perform quasi-natural experiments in difference-in-differences settings on auction houses’ provenance policy changes following authenticity litigation, and on a contamination effect of the discovery of fakes and forgeries on the oeuvre of forged artists. We also test transactions less affected by past prices, such as estate sales following the death of a collector. The findings on the relation between provenance and prices are robust to artist reputation, artistic style, auction house reputation, art market liquidity, and artist career timing.

Keywords: auction; hedonic pricing; art investment; art returns; auction house

JEL Classification: D44, G20, G11, Z11