Do Resale Rights Stimulate the Art Industry? ―in the light of economics and the spread of NFT
Hello, I’m Kensuke, a researcher at Startbahn, Inc. This article aims to introduce previous economic studies on resale rights and summarize my opinion based on increasing use of Non-Fungible Token (NFT).
Resale rights are the rights for an artist to receive a certain percentage of the transaction value (as royalties) each time his or her work is resold. This right has been introduced in several countries, including in the EU, in response to current situations in which artists are not able to recover proceeds from their artworks’ secondary sales even if their works are sold at a high price on the secondary market(*1).
In Japan, resale rights have been discussed only occasionally as a measure to stimulate the art industry; however, the widespread use of a similar royalty distribution system on NFT trading platforms, providing a private-sector service, has suddenly brought attention to resale rights as a topic of policy discussion(*2).
(a) OpenSea monthly volume
(b) OpenSea monthly fees
Figure 1: OpenSea, the largest NFT trading platform, has seen a clear upward trend in both trading volume and collected fees since 2021, with a particularly strong increase in August. For more data, please refer to this dashboard. All figures are created by @rchen8 with Dune Analytics
The question remains: can resale rights really stimulate the art industry?
For instance, collectors―buying a work on the primary market and selling it on the secondary market―might seek a lower purchase price on the primary market, considering that they will owe royalties upon sale. In this case, the artist has sacrificed the money she could have certainly earned in the present for the royalties she may earn in the future, which makes the argument that resale rights help artists and stimulate the art industry somewhat questionable.
Using such an interpretation and framework of the (inter-temporal) resource allocation by rational players, resale rights have been studied not only from a legal perspective but also from an economic perspective.
As far as I know, this is the first web article on resale rights that introduces prior studies in economics. Above all, Startbahn, Inc. has been consistently working on the implementation of a royalty distribution system (similar to the resale right) in the art industry, from the development of online auctions at its founding to the current development of Startrail (a blockchain infrastructure supporting NFT issuance).
Discussing this question on Startbahn’s Medium is therefore meaningful.
Theoretically, “not really”
Going straight to the point, the majority of theoretical studies oppose the introduction of resale rights as a policy, on the grounds that it distorts the market. More specific arguments are as follows:
- For artists, the resale right would be a compulsory investment of a portion of the profits from selling their work, so to speak, but the utility of receiving the same amount of money is higher when the artists are younger. (Ginsburgh and McAndrew, 2020)
- In addition, the resale right is a poor investment because only a handful of artists are able to sell their work on the secondary market and at high prices. (Ginsburgh and McAndrew, 2020)
- Resale rights are also inefficient as a redistributive policy because it is very costly to hire management staff, track all transactions, and collect royalties for artists. (Price, 1967; Ginsburgh and McAndrew, 2020)
- Unlike intellectual property rights, resale rights cannot be transferred or waived, but artists should have as much choice as possible. (Ginsburgh and McAndrew, 2020)
- For efficient resource allocation, each artist should make a contract with a royalty rate that is appropriate to his or her risk tolerance, rather than introducing a one-size-fits-all policy by the government. (Filer, 1984; Karp and Perloff, 1993; McCain, 1994)
On the other hand, to my knowledge, there are two arguments in favor of its introduction:
- The resale right is, at bottom, risk-shifting: shifting the uncertainty of future price fluctuations from the collector to the artist. It is therefore effective if the collector is sufficiently risk-averse and the artist sufficiently risk-loving. (Filer, 1984; Karp and Perloff, 1993; McCain, 1994)
- Artists produce multiple works during their lifetime. If the multiple works are complementary goods (i.e., the release of new works raises the price of earlier works), then resale rights become an incentive for the artist to produce new works. (Solow, 1998)
However, as mentioned earlier, Filer (1984), Karp and Perloff (1993), and McCain (1994) are against the introduction of resale rights, and the above argument corresponds to the opinion that “each artist should make a contract with a royalty rate that is appropriate to his or her risk tolerance”.
Thus, Solow (1998) is the only study that supports resale rights as a policy, which captures the example of an artist who produces multiple works, a situation which other theoretical studies do not consider. However, even his model requires the condition that a group of works by the same artist is complementary(*3).
Therefore, in theoretical studies, the answer to the question “Do resale rights stimulate the art industry?” can mostly be answered in the negative.
Empirically, “time will tell”
Empirical studies are even fewer in number than theoretical studies, and consist mainly of government reports from countries that have introduced or are considering introducing resale rights.
In particular, these reports actively discuss the case of the UK, as it boasts the second largest art market in the world (competing for this rank with China every year) and has relatively recently introduced resale rights in stages (for living artists in 2006, and for artists within 70 years of death in 2012).
Their main topic is “Do resale rights have a negative impact on the art industry?” and the arguments are divided as follows:
- There is no evidence that resale rights have a negative impact on the UK art industry. On the other hand, a survey of art industry workers showed that they were very concerned about the possible outflow of artworks abroad that the 2012 expansion might cause(*4). (Graddy et al., 2008)
- It is possible that resale rights have a negative impact on the UK art industry. The UK’s share of the global market for works by living artists has fallen from 37% in 2008 to 16% in 2013, and the value of sales itself has decreased by 8% between 2011 and 2013, and by 22% compared to 2008. The global share of trade in works by artists within 70 years of death in 2013 was 13%, down about 2% from the previous year. (McAndrew, 2014)
- There is no evidence that resale rights have a negative impact on the UK art industry. The UK art market has been on a growth trend since 2006, and the total royalties collected by the Designs and Artists Copyright Society (DACS) in 2014 under the resale right were about 0.1% of the total market in the same year, which is unlikely to be an influential amount. (DACS, 2016)
Note that the above reports are not about resale rights stimulating the art industry, but only discussing whether or not they have a negative impact. And moreover, we cannot analyze even the negative impact properly by only surveying the market size before and after resale rights, as the reports do. In order to argue that the introduction of resale right caused the change in the UK art market, we need to remove other factors that may affect the market to then make causal inferences(*5).
To my knowledge, only Banternghansa and Graddy (2011) provide such treatment at the level of academic research. This study, analyzing auction records from various countries, found that internationally, there was no negative impact from the resale right on artworks, such as a decline in price appreciation or an exodus. On the other hand, in the UK, younger artists (who have been exposed to resale rights for a longer period of time) have lower price appreciation than older artists, suggesting the existence of negative impacts.
Therefore, in empirical studies, the answer to the question “Do resale rights stimulate the art industry?” is unclear because they have not dealt with this question in the first place, and the answer to the question “Do resale rights have a negative impact on the art industry?” is also unclear because the arguments are divided.
Two opinions on this issue
In response to these discussions on resale rights, especially in light of the widespread use of NFT transactions, the author has the following two opinions.
The first is that resale rights should be delegated to the private sector.
While I agree with the theoretical argument that artists can achieve an efficient resource allocation if they make their own contracts, I have been thinking that we may need resale rights as a policy, considering the time and effort required to collect royalties for every art transaction and to make complex contracts involving various parties.
However, the widespread use of NFT transactions, in which artists can set their own royalty rates on major platforms (e.g., OpenSea, Rarible) and automatically receive the royalty (based on blockchain records), has greatly lowered the hurdle of making one’s own contracts. In other words, reality has become closer to the world envisioned in theoretical studies (where there is no cost to make a contract). In this case, the argument from theoretical studies is suddenly more persuasive. If we read the trend that the private sector can now easily conclude contracts with different royalty rates, there is little utility for the government to introduce resale rights as a policy(*6).
The second is that empirical studies will flourish in the future.
In my opinion, the paucity of available data is one of the main reasons why the number of empirical studies (covering causal inferences) has been slow to increase. Data on the prices of artworks have been obtained exclusively from auctions in the secondary market, but there are also private sales in the secondary market. Above all, data on the primary market, which is less transparent, remains very limited.
However, for NFT transactions, much richer data is available, including the frequency and number of transactions, prices and royalty rates, regardless of whether the transaction is in the primary or secondary market(*7). This new data will enable more rigorous empirical analysis on the effectiveness of resale rights, although it is only for NFTs. We may even be able to estimate the optimal royalty rate.
Startbahn will contribute from a private sector
Previous studies have yet to provide a clear answer to the question, “Do resale rights stimulate the art industry?”. However, in light of the increasing use of NFTs, we can argue that (1) resale rights should be delegated to the private sector, and (2) empirical studies will flourish in the future.
It should be noted, however, that this is only an opinion from an economic perspective, and we need further discussion on the pros and cons of treating resale rights and royalty distribution in NFT transactions as one and the same.
In any case, as a private company, Startbahn, Inc. is committed to creating a world in which artists can more easily and independently make various contracts for their works.
Figure 2: Startrail is an infrastructure for distribution and evaluation that supports the credibility and further inheritance value of artworks, and provides an environment where all stakeholders of the art world can connect and work together to manage artworks’ provenance and compliance with terms and conditions. The system is designed to meet the various needs of the art industry, including not only regular royalty distribution, but also royalty payments to third parties and transactions in countries subject to resale rights. For more details on the specifications, please refer to the explanatory article by our CTO and white paper. If you would like to try issuing Startrail certificates for your own art collection, please feel free to contact us via the Startrail website.
Finally, I would like to express my sincere gratitude to Professor Akiko OGAWA for replying to my email and introducing me to numerous government reports, even though we have yet to meet in-person.
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*1: I will not go into the history of resale rights, the specific countries introducing resale rights, the details of royalty rates, inter alia, but please refer to the explanatory article by Attorney Kodai Kimura in Japanese and the report by the World Intellectual Property Organization (WIPO) in English.
*2: Strictly speaking, NFT royalty distribution is not a legal right, so it is not a resale right. However, this article will treat them as the same system because the structure (in which the artist, as the creator, receives a certain percentage of the transaction amount for each resale) is exactly the same.
*3: Is a group of works by the same artist complementary? I am not really sure about that. Given that the price of an artist’s new works sold in the primary market tends to increase when his or her prices in the secondary market increase (because the gallery decides that there is such a demand for this artist), the group of works seems to be complementary. On the other hand, given that a major artist’s market price tends to rise overall when he or she dies (reflecting the lack of supply of new works), the group of works seems to be substitutive.
*4: At that time, the resale right applied only to living artists.
*5: McAndrew’s (2014) data is also used by Ginsburgh and McAndrew (2020), who argue against the introduction of resale rights, but they emphasize that this result alone does not allow for an immediate causal link between the resale right and the decline in the global share of the UK art market.
*6: For this reason, I am skeptical of the argument that “governments should introduce resale rights because blockchain technology will reduce the cost of tracking art transactions and collecting royalties”.
*7: NFT transaction records are sometimes discussed in terms of token graphs, in analogy with social graphs that show twitter followers and facebook friendships, etc. The author believes that we can apply the token graph not only to social network analysis but also to analysis on resale rights.
References
Banternghansa, C., & Graddy, K. (2011). The impact of the Droit de Suite in the UK: an empirical analysis. Journal of cultural economics, 35(2), 81–100.
DACS. (2016). Ten Years of the Artist’s Resale Right: Giving artists their fair share. DACS.
Filer, R. K. (1984). A theoretical analysis of the economic impact of artists’ resale royalties legislation. Journal of Cultural Economics, 8(1), 1–28.
Ginsburgh, V., & McAndrew, C. (2020). Artists’ resale rights. Handbook of Cultural Economics, Third Edition.
Graddy, K., Horowitz, N., & Szymanski, S. (2008). A study into the effect on the UK art market of the introduction of the artist’s resale right. UK Intellectual Property.
Karp, L. S., & Perloff, J. M. (1993). Legal requirements that artists receive resale royalties. International Review of Law and Economics, 13(2), 163–177.
McAndrew, C. (2014). The EU Directive on ARR and the British Art Market. The British Art Market Federation by ARTS ECONOMICS.
McCain, R. A. (1994). Bargaining power and artists’ resale dividends. Journal of Cultural Economics, 18(2), 101–112.
Price, M. E. (1967). Government policy and economic security for artists: The case of the Droit de Suite. Yale LJ, 77, 1333.
Solow, J. L. (1998). An economic analysis of the droit de suite. Journal of Cultural Economics, 22(4), 209–226.
