When a work is sold at auction, several people cash in: Depending on the terms of the contract, typically the seller rakes in the lion’s share, the auction house pockets some fees, and, if there’s a guarantor, she’ll receive a payment for assuming the risk of a no-sale. But with few exceptions, the artist who actually created the work remains wholly removed from the transaction, receiving nothing even if the auction price is significantly higher than what the artist originally sold it for.
But what if the artist continued to hold an equity stake in the artwork after that first sale? In other words, what if they continued to own a slice of the artwork? As the work’s value rises, the value of that equity stake would rise as well, even if the tangible object was held by someone else.
New research conducted by Amy Whitaker, assistant professor at New York University Steinhardt, in conjunction with Luxembourg School of Finance professor Roman Kräussl, quantifies just how lucrative such an equity stake could hypothetically be for an artist with a major secondary market. The pair looked at the returns that Robert Rauschenberg and fellow artist Jasper Johns would have seen had they been able to retain a 10% equity stake in a small sample of works sold by their dealer, Leo Castelli, between 1958 and 1963, the early years of careers that lasted decades. Whitaker and Kräussl then compared those returns to what they would have seen had they invested the dollar value of that 10% stake in the S&P 500 index.
The research is a quantitative test of a model, dubbed “fractional ownership,” that has been long been advocated by Whitaker as a way to bring equity to the art market. Under the outline of the proposed system, an artist would forgo some cash from the primary sale of an artwork, say around 10% of the overall price, and instead retain that stake as equity.
This equity stake provides a different and better way value to early-career works compared to the current system, argues Whitaker, in which artists don’t retain any stake in their early works. While early-career works cost a relatively small amount in dollar terms when first sold (and so don’t bring much income to an artist) they can go on to be some of the costliest pieces in an artist’s oeuvre. The artist doesn’t see any direct financial benefit from the upswing. Artworks are not just creative projects divorced from economics, but amount to investments by artists in themselves—this model aims to give artists benefits similar to those of early investors.
Johns and Rauschenberg are two of art history’s most successful and lucrative artists, so their experience will not be generalizable across the field, Whitaker acknowledged. But the exercise is intended to prompt a conversation about the potential benefits for an equity stake model for living artists, who currently see little direct upside when their early works get sold and resold.
Whitaker and Kräussl sifted through archival material and market data, analyzing both the primary and secondary market sale prices for 10 pieces by Rauschenberg and nine by Johns, selected because they appeared in both the records of Leo Castelli Gallery and in auction data. Their study is among the first to use primary market data in such an analysis.
Examining the returns of each individual work, the pair found that a 10% equity stake in Rauschenberg’s portfolio would have generated returns from 2.8 times to 140.8 times greater than if that money had been invested in the S&P 500, depending on the painting. The scale reflects the range between the artist’s worst-performing and best-performing work included in the research. Johns’s portfolio would have trounced the market by a factor of between 24.9 to 986.8. These results amount to “absurdly strong outperformance of the market,” as Whitaker puts it.
For example, take Rauschenberg’s State (1958), first sold for $300 in 1959. The value of a 10% equity stake ($30) would have become $44,000 as the work’s value increased. That same $30 would have returned only $2,417 over the same time if invested in the S&P 500.
The fractional ownership model might also have prevented one of art market history’s most fabled conflicts.
In 1973, art collector Robert Scull auctioned off Rauschenberg’s Thaw (1958) for $85,000, pocketing a hefty profit on an artwork purchased for only $900 just 15 years earlier. Rauschenberg didn’t see any of the returns from the increased price. The artist was so irked that Scull could profit so handily from his work that Rauschenberg confronted the collector after the auction, shoving him. Had Rauschenberg taken a 10% equity stake in Thaw (foregoing $90 in cash), when the painting hit the auction block, the artist would have made $8,500 and Scull might have been spared a shove (Scull would also made $8,500 fewer dollars from the sale).
The incident sparked proposals in the United States to help ensure artists saw some return for secondary sales of their work. Chief among them was the artist’s resale royalty. The mechanism, which is in effect for member states of the European Union as well as California, entitles living artists to a certain percentage of any resale of their artwork. Federal proposals for a resale royalty have failed through the years, and where the scheme does exist in Europe and California it has proved cumbersome to administer, yielded relatively little benefit and, some economists argue, reduced the competitiveness of the U.K.’s art market.
Fractional ownership, meanwhile, wouldn’t rely on government administration or set fees as a percentage of the overall sale but instead function as a marketplace where equity can be traded. Instead, it would rely on blockchain technology for a leaner, decentralized system. The equity could be traded independently of the piece, with blockchain allowing the work’s history and authenticity to be verified without violating the privacy of the current owner, who may not wish to be identified.
And unlike resale royalties, fractional ownership also provides the potential for gallerists to keep an equity share in work by young artists, incentivising them to adopt the model.
The system also has potential tax benefits, including that the artist can deduct part of the value of the equity stake in a work should it be donated to a museum. But the scenario raises a challenge for any future application of the model, including how a work is valued once it leaves the market and permanently enters a public institution. Even for work held privately, collectors may also have to regularly value their work to create some foundation for the equity price. And the value of an equity stake could suffer if there is mismanagement by an owner—such as if an unexpected divorce forces an ill-advised sale at the wrong time and hurts the work’s value.
Whitaker and Kräussl plan to tackle some of these questions in future studies by modeling larger portfolios that map more heterogeneous performance, and also further explore the tax implications of donations. Future models will also look at a “more dynamic portfolio construction” with frequent buying and selling of art that would more closely resemble how such a market would function in the real world.
While fractional ownership has a long way to go before widespread implication, Whitaker argues that it’s crucial to start a dialogue about equity and value in the art market now—one that thinks about how the status quo functions from the perspective of an artist.
“To see the potential of the outsize gains leads us to believe that this structural intervention in markets for creative work deserves serious consideration,” reads the study, “and that it is perhaps artists themselves who should decide whether to take the risk of retained equity.”