DP9996 Auction House Guarantees for Works of Art

Author(s): Kathryn Graddy, Jonathan Hamilton
Publication Date: May 2014
Keyword(s): economics of art, price guarantees, toeholds in auctions
JEL(s): D44, L82, Z11, Z18
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9996

Auction houses use both in-house and third-party guarantees for sellers who are concerned about the risk that not enough bidders will enter the auction for their works. Auction houses are compensated for guarantees by buyers’ commissions and successful sales after attracting important works of art. Sellers compensate third-party guarantors by splitting the excess of the final sale price over the guarantee. The guarantor can bid in the auction, and at Christie's, the third-party guarantor still receives a share of the difference between the winning price and the guarantee price, even if he wins the auction, which means the guarantor has a “toehold”. We explore the effect of guarantees (both in-house and third-party) on prices in art auctions, using a large database of auctions and a smaller database of repeat sales.