Art, Smart Contracts, and the Role of Royalties

Abstract

Royalty payment has been under heated debate in both the traditional art market and the emerging non-fungible tokens (NFTs) markets enabled by smart contracts. In this paper, we delve into the role of royalty payments in the trading market involving creators and buyers. We explore how marketplaces should design royalty policies to balance the welfare of these participants and society as a whole. Our study yields four key findings: First, when creators and buyers possess symmetric information about the future value of artworks, royalty payments can detrimentally affect art creators and overall market efficiency. Second, in the presence of information asymmetry, where creators possess more information about artwork value, royalty payments can enhance market efficiency by retaining high-quality creators while excluding low-quality ones. Third, when platforms enable creators to commit to a royalty rate, creators may differentiate themselves based on their expected qualities. Low-quality creators may opt for higher prices but lower royalty fees, while high-quality creators may choose lower prices but higher royalty fees. Fourth, under asymmetric information, the introduction of royalty fees is socially efficient only when higher-type creators are dissuaded from entering the market in the absence of royalty fees. Our findings shed light on how royalty payments can impact the welfare of different players in both the digital and traditional art markets.

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