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Vested Interest and Biased Price Estimates: Evidence from an Auction Market




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    • Department of Finance and Department of Management, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012-1126. We have benefited from discussions and comments from Orley Ashenfelter, Michael Brennan, John Campbell, Susan Douglas, Robert Engle, Victor Ginsburgh, Will Goetzmann, Tom Pugel, Larry White, and Bernie Yeung and participants at the NYU Beautiful Asset Conference and international business seminar. We are grateful to Rob Stambuagh (the editor), an associate editor, and an anonymous referee for helpful comments and to Erin Crotty, Chris Darnell, Eana Kim, and Je ik Sohn for their research assistance. We also thank Mathew Gee and Addie Kong of the Stern Computer Department for their tireless efforts in rationalizing our database.


This study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long-term performance of artworks. We find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years. High estimates at the time of purchase are associated with adverse subsequent abnormal returns. Moreover, the estimation error for individual paintings tends to persist over time. These results are consistent with the view that auction house price estimates are affected by agency problems and that some investors are credulous.