Art, Smart Contracts, and the Role of Royalties

53 Pages Posted: 23 May 2023 Last revised: 27 Oct 2023

See all articles by Wenxiao Yang

Wenxiao Yang

University of California, Berkeley - Haas School of Business

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing; Hong Kong University of Science & Technology (HKUST); Hong Kong University of Science and Technology

Date Written: October 26, 2023

Abstract

Royalty payment has been under heated debate in both the traditional art market and the emerging non-fungible tokens (NFTs) markets enabled by smart contracts. In this paper, we delve into the role of royalty payments in the trading market involving creators and buyers. We explore how marketplaces should design royalty policies to balance the welfare of these participants and society as a whole. Our study yields four key findings: First, when creators and buyers possess symmetric information about the future value of artworks, royalty payments can detrimentally affect art creators and overall market efficiency. Second, in the presence of information asymmetry, where creators possess more information about artwork value, royalty payments can enhance market efficiency by retaining high-quality creators while excluding low-quality ones. Third, when platforms enable creators to commit to a royalty rate, creators may differentiate themselves based on their expected qualities. Low-quality creators may opt for higher prices but lower royalty fees, while high-quality creators may choose lower prices but higher royalty fees. Fourth, under asymmetric information, the introduction of royalty fees is socially efficient only when higher-type creators are dissuaded from entering the market in the absence of royalty fees. Our findings shed light on how royalty payments can impact the welfare of different players in both the digital and traditional art markets.

Keywords: Smart contract, Art market, NFT, Royalty fee, Signaling, Resale platform

Suggested Citation

Yang, Wenxiao and Shi, Zijun (June) and Lin, Song, Art, Smart Contracts, and the Role of Royalties (October 26, 2023). HKUST Business School Research Paper No. 2023-109, Available at SSRN: https://ssrn.com/abstract=4449512 or http://dx.doi.org/10.2139/ssrn.4449512

Wenxiao Yang (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

LSK 4005, HKUST Business School
Clear Water Bay
Hong Kong, Hong Kong, China na
Hong Kong
Clear Water Bay (Fax)

HOME PAGE: http://www.bm.ust.hk/mark/staff/song_lin.html

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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