Incentive Model for Efficient Interaction in the Art Market

The ALLOVR model applies different elements of information economics (signaling and screening) and contract theory to the art market. The efficient market hypothesis must be clearly rejected for the art market in its current shape as it is characterized by high entry costs, low price transparency, little comparability of products (artworks) and a low number of transactions. The process of buying or selling of an artwork normally happens rarely and involves large sums of money, while the price paid is hard to be justified through comparison to other artworks or artists - making the art market one of the most illiquid asset markets there is. Consequently, collectors have insufficient information about the value and fair price of an artwork. At the same time, artists and gallerists lack sufficient information about who has a real intention to support an artist or their work.

Moreover, unproven authenticity is a widespread problem in the art market, as verifiable proofs of provenience often do not exist. Market inefficiency and untapped economic potential are the consequence. Today, the art market addresses those information asymmetry problems mostly through specialized intermediaries, namely gallerists, auction houses and experts (e.g. art appraisers). A gallerist helps the collector evaluate an artwork by providing information on the artist’s intention and background, general trends in the art market and an estimate of the future potential of the artist. Auctions offer an efficient price discovery process that facilitate price transparency in secondary market transactions. Art appraisers evaluate the authenticity and provenance of an artwork to reduce the likelihood of plagiarism, forgeries and elaborate scams$^{8}$.

However, these measurements in themselves do not suffice to address the market inefficiency problem, as gallerists and experts’ interests may still fail to align with those of collectors. Secondly, auction sales only represent a small fraction of all artwork transactions while they are completely unusual for primary artwork sales$^{9}$.

Thirdly, information asymmetries are often significantly higher for young and emerging artists who have no price history and track record. As a result, young artists are often facing the biggest hurdles to generating a sufficient income from their occupation (and often, passion). The ALLOVR model gives artists, gallerists, collectors, and supporters an additional set of tools to lower information asymmetries, align interests and ultimately improve market efficiency.

ALLOVR improves efficiency of the art market based on the following five measures:

1. Alignment of interests

2. Efficient signaling

3. Lowering market entry barriers

4. Price transparency

5. Verifiable authenticity

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$^{8}$The Glarifa Rosales/Knoedler incident serves as a reminder that even sophisticated market participants are not immune to scams. See Maria Konnikova, The Confidence Game: Why We Fall for It . . . Every Time, Viking, 12 January 2016

$^{9}$Total transaction volume in the global art market was approximately 50,1 bn USD in 2020 of which only 17.6 bn USD was processed through public auction. Source: 2021 The Art Market 2021 Report by UBS and Art Basel (https://d2u3kfwd92fzu7.cloudfront.net/The-Art-Market_2021.pdf)