From Canvas to Blockchain: Impact of Royalties on Art Market Efficiency

Since the advocacy for droit de suite in France in the 1890s, policymakers and the public have recognized artworks as intellectual property and sought to grant artists resale royalties—yet encountered heated debates and various logistical obstacles. The emergence of blockchain technology now makes automated royalty collection feasible. We examine the impact of resale royalties on artists’ pricing decisions and the overall efficiency of the art market. We build an infinite-horizon model in which an artist sells her artwork in the primary market, after which it can be resold in a sequence of secondary markets. We find that when artwork popularity is public information, royalties—acting as a tax on resales—reduce the artwork’s resale value and transaction volume, lowering the artist’s profit and leaving all market participants worse off. However, when the artist possesses superior information about artwork popularity compared with buyers, a popular artist may set an inefficiently high price to signal its appeal, which hurts primary market efficiency. In this case, royalties benefit the popular artist by reducing the unpopular artist’s incentive to mimic, thereby mitigating price distortion in the primary market. Consequently, the profit of a popular artist first increases and then decreases with the royalty rate, peaking at a unique positive rate. Social welfare may either rise or fall with the royalty rate, depending on whether the reduction in primary-market price distortion outweighs the deadweight loss in resale markets. We also analyze alternative cases of incomplete information in which either the primary buyer or neither party has superior information, and show that royalties may still increase the artist’s expected profit by reducing the price distortion in the primary market. This paper was accepted by Dmitri Kuksov, marketing. Funding: J. Chen acknowledges financial support from the National Natural Science Foundation of China [Grant 724B2030]. T. T. Ke acknowledges financial support from the National Natural Science Foundation of China [Grants 72422003 and 72394395] and the General Research Fund of the Hong Kong Research Grants Council [Grant 14500421]. X. Cao acknowledges financial support from the National Natural Science Foundation of China [Grant 72532007]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.03810 .