Artist Resale Royalties: Do They Help or Hurt?

George Condo's The Apparition. (Photo: Andrew Russeth)

In America, it’s sometime said, all big trends start in California. That’s true for great things like hot tubs, the iPod, and Pinkberry.  It’s also true for bad things, like tax revolts, Pinkberry, and . . . artist resale royalties.

Artist resale royalties?  In a previous post, we explained how California’s law guaranteeing artists 5 percent of the profits from any later sale of their artwork has some unintended consequences. The California law helps the tiny fraction of artists fortunate enough to have their work appreciate significantly in value.  But it does nothing for the 99% of artists whose work has little enduring commercial value.  Not only does it not help them, it probably hurts them. 

How? Because if buyers know that they have to pay the artist a share of any profits from later sales, they are likely to pay less in the initial transaction. (Note that artists don’t have to pay buyers when buyers lose money in a subsequent resale, so this is not a risk-sharing rule: it simply shares profits.) Because most artists will never see any resale royalties, they are likely to be worse off overall.

In other words, the right to 5 percent of a later sale is like a lottery ticket — and like lottery tickets, the vast majority of ticket holders walk away worse off. And the net effect is to transfer wealth from unsuccessful artists (the lottery losers) to successful artists (the lottery winners).

And now the N.Y. Times reports that Congress may be set to impose the California resale royalty rule on the rest of the nation.  A bill, introduced by Representative Jerrold Nadler (D-NY) and Senator Herb Kohl (D-WI), imposes a resale royalty of 7 percent on all sales of artwork at auction houses that fetch over $10,000.  Half of the money would go to the artist, and half to non-profit art museums.

So far artists do not appear to be protesting this proposal. We can think of three reasons why this might be the case. First, maybe unsuccessful and unknown artists are not a very organized bunch, and so there is no group or PAC  (“Unsung Artists of America”?) ready to lobby against this wrong-headed idea.

Alternatively, maybe we are wrong, and major buyers pay no attention to the possibility that they may have to later share their profits with artists. We are skeptical of this. And if it were true, we would expect to see little change in Californian art markets as opposed to the rest of the nation. This is ultimately an empirical question, but there is at least anecdotal evidence that art auction activity dropped in the wake of the passage of the California rule, as auctions moved to states, like New York, with no such levy on later profits.

Finally, it may be that artists, like most people, are irrationally optimistic. As a large body of research in psychology and economics has shown, many people exhibit a marked “optimism bias.” They discount the possibility that they will (fail; divorce; die in a car crash) and assume that the success is far more likely than it actually is.

Optimism bias is well-established in many settings, and there is evidence that the same is true for artists. Indeed, two studies conducted by one of us (Sprigman) and Christopher Buccafusco of the Chicago-Kent College of Law showed that creative artists value their work far higher than do potential buyers.  In the first, several hundred subjects were given the opportunity to buy and sell chances to win a haiku-writing contest.  The subjects were randomly assigned to be Authors or Bidders.  Authors were told that they would be competing against nine other haiku writers to win $50.  Each Author’s poem was assigned to a Bidder who wrote down the amount he would be willing to pay.  Similarly, each Author wrote down the amount she would be willing to accept.

The experiment revealed a significant gap in valuations.  On average, Authors were willing to sell their chance of winning the haiku contest for $22.90. But Bidders’ average willingness to pay was only $10.38.  These results are consistent with the hundreds of other studies that have confirmed optimism bias in a wide variety of settings. Authors believed that they were roughly 30% likely to win a contest where in reality they had, on average, a 10% chance. They were irrationally optimistic.  

The results of the haiku study were replicated in a study that focused on would-be professional artists – painting students from the School of the Art Institute in Chicago.  The structure was the same, but this time the prize was $100. The Painters demanded on average nearly $75, while the Bidders were willing to pay less than $18. 

If these findings are accurate, they go along way toward explaining the existence of the California rule, and the lack of opposition to the Nadler-Kohl proposal. As the old New York Lotto slogan put it, “You gotta be in it to win it!”


frankenduf

this is good news, cuz debeers will FINALLY reverse the propaganda and tell the customers that it's morally ok to resell a diamond- also, this post reminded me of the wisom of Hemingway, who defined "cosmopolitan" not esoterically, but simply as knowing how much things are really worth

Jake

This kind of law granting a percentage of every sale would provide a strange incentive for the best artists to produce pieces that are not only exceptional, but also likely to be re-sold. When the artist receives a 3.5% royalty on any transaction, I'd much rather be a marginally famous artist, whose art gets frequently traded than a great artist whose art is only purchased once and then displayed prominently. e.g. a famous piece of art that is sold once for $100,000 and then hung in a museum would net the artist less than a $10,000 piece of art that is sold 20 times. One way to avoid this odd reward system would be to treat art the same way a lot of investments are treated and only make the tax applicable to any increases in price.

Travis

This is an interestig "incentive" but I can't help but wondering how it would be practiced. How is it, that one would produce art which passes hands more frequently? Perhaps things like corporate art, I'm not sure. But it seems to me the goal of making art designed to be resold would be challenging if not impossible.

melissa

Maybe not do private portraits as much?

Travis

Couldn't there also be a 4th option, as to why there's not so much outcry against this from the art community? That it would imrpove the market for "new" art as opposed to re-selling old art.

Celarly, an artist would prefer to sell new peices rather than old ones, because they earn 100% of the sale, whereas if a person sells one of their older peices they only would get 3.5-5% of the sale.

If a person is reselling a peice of artwork, they are likely to try to pass the cost onto the buyer: the reseller is likely to increase the cost of the second sale above 5-7% of its market value. Because the initial artist in the first place doesn't have to pay royalties, as they earn all of the income from the sale, "fresh" peices will be able to be sold for cheaper than peices already in circulation.

I realise this is just turning your initial premise on its head, but as the proverb goes: "There is a reverse side, to the reverse side."

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Mike B

It's still not the government's job to impose a tax on consumers in order to help "support" artists or any other producer. If they want to help consumers by lowering prices I'm all for that...but the other way around perverts the role of government to address the needs of the majority.

LM

A similar tax on art was introduced in Australia a few years ago. It was a stupid idea then as it is now, but unfortunately I know of no follow on study of its effects. Perhaps our Productivity Commission should report on it.

john walker

The Australian scheme has resulted in reduced first sales income for some artists ( particularly those indigenous artists it was supposed to help) It has cost the government about 1 and a half million so far and has delivered about half a million in
'benefits' too artists.

This post , on Professor Jeremy Philips 1709 blog site , details the Australian scheme from an Australian artists perspective.
http://the1709blog.blogspot.com/2010/12/artist-resale-royalty-harmonisation-and.html

These schemes are simply make work schemes for the Collection agencies that endlessly lobby for their right to management fees.

Shane

At the risk of attracting thumbs down for going off-topic, I'm immediately reminded of JK Rowling's Harry Potter books, which describe conflicts between the wizards and goblins because:

The goblins create brilliant works of art and sell them to wizards. Wizards then resell them or pass them on to their children. However goblins view sales of their goods as TEMPORARY hires, and they expect the ownership to revert to goblin control on the death of the buyer. Total ownership does not move from creator to buyer (just as in your artist resale royalty example), in fact ownership remains with the goblin creator and wizards only rent it.

That's all!

Eric M. Jones.

I smell just a wiff of Multi-Level-Marketing in this scheme. You mean when I buy your work of art, I don't REALLY own it? Can I change it in some way? Can I paint a real grin on your Mona Lisa?

Rick

Exactly. If it is an ownership agreement then you have no further obligation to the person you bought it from. If a licensing or leasing agreement then the terms of the contract apply. Let contract law apply and not some regulation.

Owen

I see that you 'explained' how it hurts artists, but where's the evidence? I simply don't agree with these assumptions (and that's what they are, 'assumptions'):

"But the likely economic effects make it seem to us unfair. If the California rule applies, buyers of art can expect, on average, to make lower profits when they resell. As a consequence, they are likely to offer less in the initial transaction. And sellers likewise ought to be more willing to accept less, because they know that if a work later proves valuable, they get a slice—and given the occasionally astronomic price changes of fine art, a 5 percent cut of the resale price can dwarf the initial sales price."

It's a huge assumption with anything to say that the price people are willing to pay is based on the future resale value in dollars. This even a bigger assumption with art, in which the 'value' is determined by collectors who determine value rarely according to dollar price.

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Enter your name...

I don't know how much experience you have with fine art, but most of the sales people in the art galleries I entered on my last round in California made a point of telling me that the artwork was a "good investment" whose price was highly likely to appreciate over time. In one, the sales person really didn't talk about anything else.

Now if you're talking about the stuff at the local crafts fair for a couple hundred bucks (or less), the market behaves quite differently, but there is at least some interest in re-sale prices once you get into the four-digit or higher range.

melissa

The really interesting question then becomes whether (or when in future laws) the royalty right becomes transferrable. Then you'll see a new industry pop up, of companies buying up royalty rights from artists, bundling them into securities... well, you know the rest of the story from there!

Ken Arromdee

If the royalty right becomes transferrable that would defeat the purpose: whenever someone buys a work of art, they'll just buy the royalty right as well.

YN

FYI: http://www.ecares.org/ecare/personal/ginsburgh/papers/176.%20towse.pdf (from this handbook: http://www.amazon.com/Handbook-Cultural-Economics-Ruth-Towse/dp/1848448872)

john walker

Many economic studies have seriously questioned the assumptions underlying the argument that resale royalties have net benefits to artists. Australia’s chief lobbyist for the adoption of artist resale royalties, the collection society, Viscopy, commissioned in 2004 a report from Access Economics to model the likely impact of their scheme. In the resulting report, Access Economics warned that the claim of net benefit to artists was: “based upon extremely unrealistic assumptions, in particular the assumption that seller and buyer behaviour would be completely unaffected by the introduction of RRR [ARR]” and that, “ Access Economics considers that the results of this analysis are both unhelpful and potentially misleading.Link here to report pdf: https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B_ik4LNeE71EYWNiMTk4YzctM2MyMy00ZGVkLThjODAtZGI3Y2E0MDI0NzE5&hl=en_GB

Viscopy suppressed this report.

The resale right only needs to have a tiny negative impact on buyer behaviour in the primary market to have major negative impacts on artists’ net income. Because the harm caused to artists by such schemes comes in the form of what doesn’t happen, the harm caused is easily overlooked and underestimated.

For example, when an artist sells a painting for $10,000, the artist typically pays, say $5,000, to the costs of sales and marketing (through their representative agent) and retains $5,000 as income. In the case of $10,000 resale, the artist would receive $287. If buyer nervousness about the resale royalty, was to cause an artist to lose just one $10,000 primary market sale that artist would need the royalty owed on almost $240,000 of future resales to recoup the lost income of that one primary market sale. These are very unattractive odds.

Claims that there is even potentially a “global” resale royalty scheme are extremely misleading. The scheme that is being advocated for in America is a hybrid of hypothecated tax and individual royalty right. The scheme in the UK is essentially an individual right (although it generates a lot of money that cannot be paid to the individual rightholder and is therefore redistributed). In Germany, the scheme takes the form of an open, hypothecated tax. In Australia, the scheme is not retrospective in application and artists have a limited right to refuse to use this ‘right’. In Australia, for constitutional and political-cultural reasons, hypothecated taxes are not acceptable; and retrospective application of laws is restricted to matters of national significance.

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Jay Jackson

Even if those artists were unsuccessful, they still somehow need to be praised and recognized for their work. The royalties they will be receiving is good enough for them to know that they have been remembered.

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