The Business of Art

By Ariel West

Today’s art market is plagued with frauds, thefts, forgeries and overall market failure, and the current governing legal framework has made it worse. Surprisingly, the art market defends its business culture and rejects attempts at restructuring. Why?

“The art market prefers a market that favors the seller: You purchase a piece of art and expect the art to appreciate in value; thus you can resell the work at a higher price,” says Greg Day, assistant professor for economics and legal studies in business at the Oklahoma State University Spears School of Business.

“But what if you found out that the art you just purchased was a forgery? Victims of forgeries have little legal recourse against the seller and must return it without compensation, regardless of the generations that have passed since the theft occurred.”

Day’s research, titled “Explaining the Art Market’s Thefts, Frauds, and Forgeries (And Why the Art Market Does Not Seem to Care),” was featured in the Vanderbilt Journal of Entertainment and Technology Law in 2014. The research looked into deceptive practices in the art market.

Suppressing information about the authenticity of a piece of art means gaps in titling and ownership are common, accepted occurrences. Even the most diligent art consumer can’t always access enough reliable information to determine if an art deal is a wise investment.

“One of New York’s most well-known private galleries, Knoedler and Company, sold forgeries for a decade,” Day says. “A man created the forgeries in his garage and sold them to Knoedler as authentics for more than $40 million in profit. Even with this scandal, few in the art industry have attempted to add transparency to the market.”

Questions that need clear, definite answers when purchasing art include:

Does the work’s value equal the selling price?

Is the work authentic?

Can anyone else claim ownership of the work?

The art industry cites its preference for strict confidentiality in its refusal to provide reliable information. A work loses marketability and value when others assert a claim over it.

“There’s really no incentive to discover the true nature of a piece of art,” Day says. “To do so could drive down the price. No one wants to buy a piece of art when there have been claim wars over it because it damages the marketability when a finding is negative. So, business is conducted secretly. The sad irony is that the art market’s transactional secrecy has become both a cause and effect of art theft, further reducing the information a consumer can rely on.”

Another issue is an artist’s catalogue raisonné, a catalog listing all of an artist’s known works. Those experts in control of the catalog have an incentive to not authenticate a work, as it would drive the value down for other works by the same artist.

“With all of these problems, the blame lies on the legal regime,” Day says. “The law has neglected to account for the unique qualities of art and the history of its trade.

Most of the laws seek to encourage buyers to purchase commodities that are free of titling issues but don’t recognize that the majority of works must be sold on the secondary market. Buyers and sellers can’t adjust to what the law demands, so they turn to secrecy and other undesirable behaviors that contribute to market failure.”

Despite these issues, the art market seems content with the current methods of buying and selling. Day proposes reforms to allow the art market to operate better.

“The buyers’ and sellers’ interests are aligned in the art market, so no one wants to change it, even though the market is technically in failure,” Day says. “For reform to happen, it should consider methods that encourage buyers, sellers and dealers to be more forthright.

“The law needs to make communicating information appealing and protect a speaker from potential peril. Insurance could be offered. Art-theft databases could be created. Hold dealers accountable. All of these could help improve the art market.”