On the allocation of talents in the contemporary art market

This paper investigates the selection of artists by a gallery in presence of adverse selection and moral hazard. Artists have heterogeneous creativity and are divided into two groups: those who innovated and those who did not. Artists reveal their type by participating in an auction where the employer offers a menu of contracts specifying output and wage. When the gallery has monopolistic power, price is set to give a premium to innovation. Thus, when that gallery has to choose between two low-creativity artists, it hires the artist who innovated, in a Bayesian Nash equilibrium. In contrast, a gallery with little market power facing the same alternative hires the artist who did not innovate because it cannot exploit the innovation premium. This result indicates that a segmented market with gatekeeping, in which some artists have no opportunity to bid and join a top gallery, has a negative impact on innovation. The analysis also shows that “superstar” artists (combining creativity with innovation) are more likely to end in top galleries. On the contrary, young talented (creative) artists are relatively more frequently found in galleries with little market power.