Reported returns on investment for artwork are too high

Art is something one may like to have for the enjoyment of it, but it is also often touted as an investment vehicle. Quite obviously, you would need to diversify heavily. "Experts" claim that art gets a good return on average and that it is viable investment option.

Arthur Korteweg, Roman Kräussl and Patrick Verwijmeren say it is not. The issue is that all the indexes out there are based on transactions, and art items that have higher returns tend to have a higher turnover. The resulting selection bias is not negligible: 7% instead of 11%. Given that high amount of risk, it thus does not look like art is a good investment, unless you enjoy it, of course.

What is so strange about the arts labor market?

Why are people drawn to work as an artist? This kind of job seems to have all the characteristics that one would like to avoid for a typical career: very low pay, usually the need to supplement income with another job, the most unequal distribution of income of any field, and with all this a chronic oversupply of labor. One may argue that one should set Economics aside for the arts labor market, but I do not believe that the love of arts can be the only explanation for this uncharacteristic labor market. People need to live, and if they love the arts they can always do this as a hobby.

Milenko Popović and Kruna Ratković find a better explanation. An artist's productivity is a function of accumulated art-specific human capital. If artists are forward-looking and they can cope with very low income during their formative years, it can then make sense to get into such a career. The issue is the uncertainty whether one's artistic career will actually pan out. This is where the oversupply comes in: many people start an artistic career to see how it works out, but eventually drop out. While all this makes intuitive sense this last part about uncertainty is largely hand-waved by the authors and should be subject to some serious quantitative exercise to see whether it can hold water with data, though. Thus, I am still not letting my children get into such careers.

All hail news aggregators!

Newspapers have been fighting a losing battle with news aggregators on the grounds that the latter allow readers to bypass the newspaper front pages by deep linking to news articles, thereby reducing advertising income. This argument has always puzzled me, as news aggregators allow readers to discover these articles in the first place. It appears, though, that news aggregators have a different and so far neglected impact on the newspaper industry: the content of newspapers is changing.

Doh‐Shin Jeon and Nikrooz Nasr Esfahani imagine a world where newspapers try to steal readers from each other by exploiting the presence of news aggregators. Readers are interested in a number of issues, and newspapers write articles about them. They may try to cover many issues and choose how much quality to put into the reporting. Suppose the news aggregator identifies the highest quality article for each issue. When readers switch from following the local newspaper to following the news aggregator, the newspapers are forced to specialize into a few issue and perform much higher quality reporting. As a result the readers get much better news, newspapers make get less profits, though, but only if there were few competitors to start with. If you have many small newspapers, they become niche providers on very few topic and take great advantage from the news aggregator. And we are all happy for it.

Some people go to classical concerts to cough

Classical concerts comes with a set of very strict rules for the public: you cannot applaud while the music plays (the only exception being after opera arias), you are supposed to dress up, and there should be complete silence from the audience during the performance. And that urge to cough should be repressed until an applause. Yet, it turns out that coughing is more frequent during the performance.

Andreas Wagener ponders from an economic angle this apparent voluntary breach of concert etiquette. Norms at concerts are supposed to create conformity. Concerts are, to some extend, also a venue where you want to be seen. Being against the norm in subtle ways make you more remarkable. Parading naked would certainly get you noticed, but in a bad way. Coughing at the wrong moment also gets you noticed, but you can be excused unless you dared to go to the concert with a severe case of whooping cough. The cougher can always blame it on a bodily reflex that is unexpected and cannot be controlled. At it looks like the empirical evidence shows coughing is more prevalent in quiet moments of the concerts, when the benefit of coughing is the highest.

Concert halls will be packed in this flu season.

Hysteresis in cultural supply

Some cities permeate culture more than others. I have been struck how classical music is present in Vienna, where street musicians have symphonic orchestra quality. In this particular case, this may come from the city's history in classical composers, generating local interest in this type of culture. It may also be a market response to the tourists visiting Vienna thanks to this history.

Karol Jan Borowiecki looks at local preferences for classical music (as measured by the supply of cultural versus non-cultural goods) in Italy and finds that a substantial amount of cross-province variation can be explained by the birthplaces of Renaissance composers. This is a remarkable amount of persistence. Whether this reflects preferences of locals or tourists remains open, though.

Women and children first? No

The infamous quadruplicate papers of Frey, Savage and Torgler have caused a lot of grief for their multiplicity, yet they yielded a somewhat interesting, yet old result: women and children get priority on maritime disasters, crew are last, and there are some subtle differences among passengers from different nationalities. This result, however, was obtained using a sample of two: the Titanic and the Lusitania. And one also argue that there was some selection bias for the Titanic, as this was a much celebrated inaugural voyage with, let's say, an unusual set of passengers. It could therefore not hurt to increase the sample size.

Mikael Elinder and Oscar Erixson jack up the sample from 2 to 18. And the results are completely reversed. Women are at a distinct disadvantage, crew fare much better than the rest. This is the outcome you would expect from a free-for-all situation where weaker women get pushed aside on the run for the lifeboats. The lesson from this: do not trust a sample of two, even if amplified by four publications.

File sharing and the structure of the music market

For as long as music has existed, artists have lived from performing. The advent of packaged music (radio, TV, disk, tape or CD) has changed little to this, as the new medium has been more about promoting the artist than making money for the artist, with few exceptions. The ones making money from sales are the record companies, and the appearance on file-sharing is challenging their business model while not affecting the artist's way of living. In fact, the latter appreciate the zero marginal cost promotion. But the record companies want to survive.

Ralf Dewenter, Justus Haucap and Tobias Wenzel study the interaction of record and ticket sales under the assumption that both benefit from each other. Clearly, the impact of file sharing is ambiguous: it may increase record sales if people discover an artist through file-sharing and attend a show. But some potential sales are lost when a very close substitute is available for free. The solution for the record companies to to take over the management of concerts as well. Whether the artists want to go along with that is another question.

The demand for theater

What determines demand for theater? Theater managers should be interested in understanding their market. Beyond this, this is also important for policy as theater is frequently and substantially subsidized. This the characteristics of those who go to theater and how frequently they do so may help understand whether it is worth subsidizing it. For example, if only rich people go to theater, one could leave the state out and let the public pay higher prices, which substitute for taxes (and would then improve efficiency). If it is mostly poor people who attend theater, then it may be worth subsidizing if there is some sort of positive externality from it.

Concetta Castiglione uses micro data from Italy to find results that are not very surprising: everything is driven by education and income. Rich educated people pay more taxes and get them back in part in theater performances. This is even more pronounced than for higher education, for which forceful arguments have been made that the state should stop subsidizing it.

Of course, all this ignores consideration about the supply. but that does not matter here. Demand should be essentially the same whether theaters are subsidized or not in Italy.

The smart children of vengeance

As someone who has been raised in a non-violent environment, I am often surprised how people in some circles easily resort to vengeance and violence while a conciliatory attitude could have resolved "issues" quickly and efficiently. There is certainly a good deal of learned behavior that determines whether you are of a conflicting or conciliatory type, and this learning comes from example, in the family, among peers and in society. Society is important (say, compare Scandinavia to the Balkans) but there are also striking differences within societies. That is where parents may come in.

Ruby Henry studies how the use of retaliation is transmitted to children, first using a model of education effort by parents, and then using UK National Childhood Development Survey. The theoretical prediction is confirmed that high-cognitive parents are better able to transmit their values and override the peer culture, as long as the parents are retaliators. Indeed, if a child is told to retaliate and meet a forgiver, he wins and his values are reinforced. If he is a forgiver and meets a retaliator, he looses and is upset by the teachings of his parents. It the long run, this means that humankind will settle on a retaliating culture. But I do not think this is what we observe. In fact, there are less wars, people abide more to contracts and, I think, respect more the rule of law over time. Correct me if I am wrong.

Revenue sharing in rock bands

Rock bands are often volatile associations. While there may often be conflicts about the creative orientation of the band, conflicts are too often about jealousies regarding free riders or members who attract too much attention. Fundamentally, these are issues about contracting who does what and who gets what. In particular, when a band member is doing more creative work, should he also be getting a larger share of income (to reward creativity) or the same as the others (to avoid some jealousies)?

This is the question that Cédric Ceulemans, Victor Ginsburgh and Patrick Legros ask. The trade-off is clear: you want to attract more creative band members for its success, and you want to give them credit for this by giving them a larger share of the pie. So you may want to associate one creative musician with less creative ones (in a complete contract) or only creative ones (in a incomplete, uniformly sharing contract) depending on what it means for the probability of achieving a hit, and the type of contract will determine who wants to form a band and whether the band will outsource song writing (and how much effort each member puts into it). The theoretical analysis shows that under a complete contract, the more disperse the credits are, the more successful the band is (reflecting very much the winner-takes-all features of show business?). The relationship is negative for incomplete contracts, which is apparently true in the data. This means that bands are driven to write incomplete contracts.

Being rationally agnostic

What religion should people adopt if there is uncertainty about the existence of deity? If there were only one choice, to believe or not in a god, the choice would be rather simple as Pascal's wager taught us: believe in the god just in case he turns out to exist. Things become a bit more complex if one has also to choose in which god to potentially believe. First, the fact that they are multiple candidate gods means all but at most one may turn out to be frauds, and choosing the wrong one may have serious adverse consequences. What to believe then? Luckily, economists have you covered.

Tigran Melkonyan and Mark Pingle use decision theory to come to the conclusion that agnosticism, which is to not take a stand, is an optimal choice if any combination of the following hold sufficiently strongly: 1) in-life benefits of agnosticism are higher than "other" religions, 2) the after-life benefits of agnosticism are not too much lower, 3) none of the religions is very likely to be correct, 4) life is not too long or too short, or 5) transition costs from agnosticism to a religion are lower than between religions. These all make intuitive sense, except the fourth, which has to do with the fact that if life is short, you want to believe in a god right away. If life is still expected to be long, you want to believe in no god. Agnosticism is in the middle, where you postpone a choice when you can afford to do so.

It would thus seem that many more people should be agnostic then there are (1-10% in the US). Why so? I would think this has to do with the fact that we do not make such choices from a clean slate: we are conditioned by the environment we grew up in, and kids are easily impressionable. Once they have been told to believe in a particular god, switching to agnosticism is very difficult: you face the disapprobation of the immediate family and peers. But their is also the fact that in any situation, it is very difficult to change the opinion of a person, even if the person is wrong. We are all conditioned that way, and while we easily adopt a first opinion, we rarely change it. This inertia will keep agnosticism, and atheism, a minority in the US for a long time still.

Online dating and the business cycle

During an unemployment spell, people spend significantly more time on leisure and may thus be more interested in social activities like dating. It is simply a matter of available time. But for those who suffer from a reduction in wages during a recession, things are not so clear: the income effect would lead to a reduction in leisure, while the substitution effect would favor an increase. And this interest in dating is not trivial, as 10% of people in the US a registered with an online dating service at any time, while this is 18% in Europe.

Véronique Flambard, Nicolas Vaillant and François-Charles Wolff point out that this ambiguity is even stronger with the demand of dating services, as some would want to find more solace in a partner during hard times, while other feel less secure in dating. The impact of a recession on dating services thus needs to be sorted out empirically. They do this for France with a short monthly times series on economic sentiments, an indicator of dating services (searches for a popular online service on Google) and lagged fertility (as a proxy for those leaving the dating market for good). I am not completely convinced that 56 months of data are sufficient to capture what happens over business cycles (of which there is only one in the data), but let us take this seriously. Using a VECM using four lags (thus we are down to 41 degrees of freedom, they find evidence that dating services demand increases during a downturn. That should hardly surprise us given the impact of the unemployed. Using microeconomic data that distinguishes between the employed and the unemployed would have delivered more interesting results. In fact, using more direct observations of what is to be measured would make results credible.

Richard Wagner's Lohengrin and game theory

The analysis of fiction or fictional worlds from an economic point of view is an interesting "hobby" of some economists, from the Economics of Harry Potter, World of Warcraft to CSI: Crime Scene Investigation. There appears to be also a stream of research dealing with operas, and in particular Wagner's, which are full of intrigues, hard decisions and conflicting beliefs.

Ilias Chrissochoidis and Steffen Huck look at Lohengrin. The story is about whom to believe, commitment, signaling, normal form games, Bayesian updating, and asymmetric information. I need to listen again to Lohengrin, which I have not touched in decades. Maybe I will hear it with a new ear now that I can recognize all the Economics in it. This paper is totally useless for policy, yet fascinating.

How to price museum visits

So you come across a museum and wonder whether it is worth visiting. The entrance price is rather steep, and given the uncertainty of your future enjoyment, you decide to pass on the opportunity and walk on. Could the museum have found a way to still attract you? One way would be to give you free entry, but this would oviously lead to loss of revenue and overuse of the museum.

Bruno Frey and Lasse Steiner claim it can attract casual visitors by asking for an entrance fee that depends on the time spent in the museum. This would allow for a cheap "sneak peek," and true lovers would pay much closer to their marginal utility. This is more efficient than exit donations, as those are voluntary and thus lead to loss of revenue and overuse of the museum. Keeping in mind that a museum's mission is often to spread knowledge and enjoyment, this scheme is much more likely to attract visitors with lower marginal utility and possibly expose them to arts or sciences they may learn to appreciate. Instead, museums typically emphasize club memberships, who cater to visitors who would have come anyway and offer them deep discounts that bring revenue loss.

Religious sacrifices in the lab

We all had chuckle when learning about some tribe or civilization making sacrifices to some spirit or deity, sacrifices that seem to be completely ineffective and the result of some superstitions. Before doing some navel gazing whether the sacrifices we do ourselves to our churches fit the same bill, let us think whether there is something innate that makes us surrender to such superstitions with useless sacrifices.

Paul Frijters and Juan Barón perform an experiment whereby participants experience outcome uncertainty due to "Theoi," and participants can make a sacrifice to "Theoi." Despite the fact that these sacrifices have no impact on outcomes, they amount to a staggering 30% of takings. Even labeling the source of the uncertainty later in the experiment as "the weather," which is clearly exogenous, does not change things. Participants facing no uncertainty still sacrificed 7%.

What does it tell us about human nature? Faced with the unknown, we believe we can still influence it with some sacrifice, no matter who irrational that may seem. And this seems to be deeply ingrained in us, as animals do the same, such as pigeons.

Further evidence on the profit motive of churches

The Catholic Church is facing quite a lot of heat lately, to a large extend because it put the welfare of the organization far ahead of the welfare of its constituents. The Church denies this, of course. It is of interest here whether its other actions corroborate its social welfare motives.

Carla Marchese and Giovanni Ramello find an intriguing fact: since 2005, the teachings of the Pope are copyrighted. Copyright is like a monopoly in that it reduces quantity and maximizes private profits. Why would the Church adopt this model if it were trying to save as many souls as possible? The authors are gentle here and claim that the Church just wants to tax other media outlets that would make money by diffusing the Pope's message. I would not be that lenient. Indeed, this motivation only works if there is imperfect competition across media outlets, and then only under specific conditions. It is true that proceeds can be used to subsidize the Church's own publications, but seeing the profit margin of the Vatican's publisher (16%), it does not look likely.

Accounting for moderate religion

Religions are clubs and theory tries to explain why people want to join them and then stay. Current theory is good at replicating corner solutions: extremists that invest at high cost (time, money and future prospects) to participate in a religion, like it is the case for sects, strict religious orders or extremist militants. But this theory has nothing to say about moderate religion, that is people that participate in religion an hour every Sunday and then occasional additional activities, and thus provide much less sacrifice and yet still .

Michael Makowsky shows that ones you combine agent heterogeneity and repeated decisions, moderate religious groups are viable and may even dominate the landscape. Members of a group contribute time and money, and the wage heterogeneity convexifies the scale of agents. One more area where heterogeneity appears crucial to understanding data, even if this means that solutions are complex and may have to be solved by computer.

File sharing is welfare enhancing

Intellectual property for music is rapidly eroding, and the big music labels are complaining loudly about this. They argue that file sharing and other illicit duplication is eroding their revenue and thus the artists' (and some other people's) income. We have shown previously that less copyright is better for artistic creation, and thus welfare, But let us abstract from this and ask whether file sharing in itself is bad for society.

Jean-Jacques Herings, Ronald Peeters and Michael Yang address this using a model where consumers can choose the medium of the music they acquire every period, and music label are forward looking in their pricing strategy, as consumers lock into their medium choice, to some extent. There is thus an incentive to keep CD prices low, both to attract current sales, but also to entice consumers to buy CDs is the future as well. Also, file sharing keeps monopolistic behavior of the music industry at bay. The results: while file sharing reduces the music industry's profits, it increases the amount of music enjoyed by the population, and thus welfare. We should do not the same with our research in Economics. Wait, we already do

Shorter copyrights stimulate artistic creation

As I have expressed before on this blog, I am no big fan of patents and copyrights, and monopoly power in general. I am particularly annoyed, on a personal level, by copyrights on music that have been menacing Internet radio for a while now. I have always believed that the fact that artists have a free medium that allows them to be discovered is much better for them than being fed on commercial radio what the big labels deem good for the general public.

So it is refreshing to see that there are other arguments that show that copyrights are bad for artists. Francisco Alcalá and Miguel Gonzalez-Maestre model the artist market taking into account that it is close to a winner-take-all tournament, that the number of artists worth listening to depends on the number of them starting out (in other words, there is hidden talent that reveals itself with time), and promotions matter a lot. They find that lengthening copyrights, while increasing profits of superstars, does not necessarily encourage more people to become artists. And increasing the pool of talent is what we really care about. The key intuition here is that with longer copyrights, superstars will provide more effort in the form of promotions in order to capture a larger share of the markets. Less is left ofr other talent, who then do not bother starting a career.

Fairness, culture and selfish American men

Economic theory mostly assumes that individuals are self-interested, yet there is plenty of evidence that they also value fairness and incorporate the utility of others, including people they are not related to. So they may not be that self-interested or, put it in another way, their utility function has other arguments that pertain to other individuals or to aggregate measures. Sociologists and psychologists would argue here that at least part of this interest in others comes from education or societal pressure. Many studies have highlighted that some societies are more caring, and others more greedy. Much of this is based on surveys.

Economists do generally not like surveys because they do not reflect actual decisions. But controlled experiments or good data are very hard to come by. Bruno Frey, David Savage and Benno Torgler found an interesting data set: the passengers of the Titanic. There is a well established societal norm that women and children have priority in situation of life and death where a future reciprocity is not expected. It this norm really applied?

Take as an example the contrast between British and American customs: In Britain, people queue for everything and apply strictly the norm of :first come first served". In the US, the price is much more used as a selection mechanism, thus wealth matters more. In the context of the Titanic, this would mean: among Brits, a larger proportion of women and children than men should have survived; among Americans, the survivors should be more frequent in first class than third class. According to this analysis by John Henderson, this hypothesis would be correct: the survival rate in third class for British women is 47%, British children 35% and British men 12%. Americans in first class survived at a rate of 67%, 47% in second class and 28% in third class. Interestingly, 58% of Americans survived against of 33% Brits. Did Americans push their way to the lifeboats?

But the analysis is not that simple: there can be composition effects: American may have been proportionally more numerous is higher classes or with more females. Few staff survived, and they may have been disproportionately British. Thus, simple averages are not enough, some proper regression analysis is required using a variety of controls. This is what Frey, Savage and Torgler do and they confirm that women and children had higher survival rates, thus societal norms seem to have largely prevailed. Passengers from higher classes also had a higher survival probability, but this result is likely tainted by the fact that 1) they were better informed as early on few believed the Titanic would sink, 2) most boats were on the first class deck.

And even with all those controls, the British are more likely to die and the Americans are those most likely to survive. But this distinction is not visible among women. Ah, those selfish American men.