On the Role and Design of Art Royalties

55 Pages Posted: 23 May 2023 Last revised: 3 Nov 2024

See all articles by Wenxiao Yang

Wenxiao Yang

University of California, Berkeley - Haas School of Business

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing; Hong Kong University of Science & Technology (HKUST); Hong Kong University of Science and Technology

Date Written: October 26, 2023

Abstract

Resale royalties for artworks have long been a subject of policy debate, recently reignited by the rise of non-fungible tokens and smart contracts. Despite ongoing discussions, consensus remains elusive regarding the net benefits of royalties for creators and society, as well as the optimal design of royalty policies. This paper emphasizes the critical role of information asymmetry in determining the effectiveness of resale royalties in the art market. We show that both prices and royalty rates can act as quality signals in markets where creators are better informed than buyers. Notably, even an exogenous positive royalty rate can strengthen the signaling role of prices, especially in markets with a limited number of informed buyers, where high-quality creators cannot rely solely on price as a signal. Additionally, a fixed royalty rate can serve directly as a signaling mechanism, with high-quality creators adopting a strategy of setting lower upfront prices paired with higher royalty rates to differentiate themselves from lower-quality creators. The benefits of this strategy for high-quality creators depend not only on their ability to signal quality but also on inefficiencies in the secondary market induced by the royalty rate, which negatively affect all creators and reduce overall social welfare. The net welfare impact is contingent upon the expected distribution of artwork quality and the level of information asymmetry in the market. These findings offer valuable insights for policy debate on resale royalties and hold significant implications for both traditional art markets and digital platforms that employ smart contracts.

Keywords: Smart contract, Art market, NFT, Royalty fee, Signaling, Resale platform, Platform design

Suggested Citation

Yang, Wenxiao and Shi, Zijun (June) and Lin, Song, On the Role and Design of Art Royalties (October 26, 2023). HKUST Business School Research Paper No. 2023-109, Available at SSRN: https://ssrn.com/abstract=4449512 or http://dx.doi.org/10.2139/ssrn.4449512

Wenxiao Yang (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

LSK 4005, HKUST Business School
Clear Water Bay
Hong Kong, Hong Kong, China na
Hong Kong
Clear Water Bay (Fax)

HOME PAGE: http://www.bm.ust.hk/mark/staff/song_lin.html

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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