The impact of reserve prices on the perceived bias of expert appraisals of fine art

Abstract

SUMMARY We examine whether expert appraisals provided to bidders before major art auctions are unbiased indicators of value. Despite a strong grounding in theory, this aspect of optimal auction design has been frequently challenged in previous empirical research, particularly in the market for fine art. We adopt a valuation benchmark that incorporates sellers' reserve prices as well as high bids, and recognize censoring of works that fail to make reserve. Although the auction houses never divulge reserve prices, we exploit the fact that they can be observed indirectly via their impact on buy‐in rates. Using the set of French Impressionist paintings brought to auction from 1985 to 2001, we estimate the distribution of reserve prices, establish their link to a proper valuation benchmark, and isolate the selection bias due to bought‐in works on the perceived market value of fine art works. After controlling for the impact of reserve prices, and considering all works brought to auction, we find no evidence of bias in the experts' pre‐sale estimates. Copyright © 2010 John Wiley & Sons, Ltd.

The economics of aesthetics and record prices for art since 1701

“…A number of papers (e.g., Bauwens and Ginsburgh, 2000;McAndrew et al, 2012) have examined whether pre-sale estimates are informationally efficient. Yet, a related question is whether auction houses can influence auction outcomes by setting estimates strategically, for example as to increase participation or affect bidders' beliefs about potential resale revenues.…”

Pre‐sale information and hammer prices for Australian Indigenous art

“…McAndrew et al . () argue that it is appropriate to work in logarithms as this reduces skewness and thus equation applies to the logarithm of the sale price and that it will be the geometric mean, G , of the lower and upper estimates that will be a reliable estimate of the sale price. The coefficient on the geometric mean can be interpreted as the elasticity of realised prices with respect to pre‐sale price estimates.…”

“…As discussed above, McAndrew et al . () have argued that models should be for the logarithm of the hammer price. The logarithmic transformation both reduces skewness and produces a distribution more likely to be normal as required for an OLS regression.…”

“…To date, the empirical evidence on this theoretical prediction appears to be mixed. There is evidence of pre‐sale price estimates being good predictors of realised prices (see, for example, Czujack and Martins, ; McAndrew et al ., ). However, we also see pre‐sale price estimates being poor predictors because of systematic under‐ or over‐estimation (see, for example, Beggs and Graddy, ; Ekelund et al ., ; Bauwens and Ginsburgh, ; D'Souza and Prentice, ).…”

Experience and Brokerage in Asset Markets: Evidence from Art Auctions

“…Finally, our paper contributes to the literature on art economics by exploring whether brokers can affect the results of art auctions (Ashenfelter, 1989;Bauwens and Ginsburg, 2000;McAndrew, Smith, and Thompson, 2012). In particular, we find evidence of differences in auction outcomes due to the experience and specialization in a given artistic segment.…”