The authors comment
Using unique historical sales data from the Leo Castelli Gallery, we introduce a novel model of evaluating art market returns using first-sale prices alongside auction results. We create a sample portfolio to analyze what would have happened if the artists Jasper Johns and Robert Rauschenberg had retained 10% equity in the work they sold through their dealer in the years 1958 to 1963, which was the start-up phase of the artists’ careers. We find that this retained-equity portfolio would have performed from 2.8 up to 140.8 times better (Rauschenberg) and from 24.9 up to 986.8 times better (Johns) than the S&P 500 over the same period. Modeling equity portfolios for artists changes the fundamental structure of art markets. Because the fractional equity is a property right under the Coase theorem, this system introduces a secondary market for shares in artwork. These shares could trade using a technology such as the blockchain and would allow more democratic and diversifiable access to investment in art markets. Our framework extends to other creative industries in which early-stage work is difficult to value.They conclude
We undertook the analysis of whether fractional equity would outperform the art market because we observed the structural misalignment of price and value. We did not know at the outset that we would see such outsize performance. To outperform the market by a factor of five is handy; to do so by a factor of up 1,000 is suspicious. We acknowledge that we were working with the earliest work of two of the most well known American artists of the twentieth and twenty-first centuries. As stated earlier, we did not intend this work, by any means, to extend to describe the likely trajectory of all artists in markets. Our work here shows more simply what is possible, and given that large possibility, why the question of shared value matters.
A system of fractional equity has downside risk, of course, but it is not a leveraged asset within this study and so the floor is zero, or is the opportunity cost of foregone gains in other investments. There would surely be many cases in which artists retained equity and received no gains, therefore giving up cash at the moment of sale. Yet to see the potential of the outsize gains leads us to believe that this structural intervention in markets for creative work deserves serious consideration and that it is perhaps artists themselves who should decide whether to take the risk of retained equity. In practice and over time, artists might not even forego income to retain equity; prices might adjust upward.
We see several directions for future research. First, the magnitude of the degree to which the two artists’ retained equity portfolios outperformed the market leads us to want to design more conservative tests. As such, we would model larger portfolios with more heterogeneous performance, such as artworks sold in group shows, or whole collections. Second, we plan to develop further the ways of modeling the tax implications of donations and the resulting possibility of asset value truncation through donation, and to build valuation models that take into account artists’ costs of production. Third, through appraisal records, we plan to create more of a “mark to market” model rather than a linear imputed return. Finally, we intend to model a more dynamic portfolio construction, i.e., a portfolio with more buying and selling of art, which would start to describe the kind of investor behavior that would grow as fractional shares entered the market and trading in and out of them became relatively liquid.
Fundamentally, artists have a real claim on the added value in art investors’ subsequent gains. Outside the arts, markets depend on innovation but lack systems to align rewards for creative risk with pay. We conclude by returning to the starting point of the data in this study, which was a handwritten notebook. In cursive handwriting in a small personal notebook, Leo Castelli recorded $300 sales that would go on to become multi-million dollar auction results. And before that, in poorly heated studios, the artists developed the art itself. The moment of value creation is, in its idiosyncrasy, markedly different from the moment of value capture as the work is later resold. The fractional equity model bridges the idiosyncratic starting point and possible stratospheric returns, while offering tools for diversified investment and democratized access to markets for art. The purpose of this study is broader than whether the artists receive a good investment return. The sheer act of assigning the equity is a structural alignment of price and value that generalizes beyond fine art, to represent ways of making the risks of research and development in early stage creative work in any field conform to the market’s ability to assign value. Ultimately, our model solves for the central difficulty of pricing—that is, accurately reflecting the value of—early-stage creative work. Value can be more flexibly, and in the long run more accurately, assigned as a fraction than a dollar amount. Thus, these now famous artworks have something crucial to tell us about the value created by labor, broadly defined. These artists underscore the necessity of seeing early-stage creative work as an act of investment. The blockchain enables a future of work in which anyone can have fractional ownership of the upside they help to create