The presence of information externality, and the consequent necessity of public intervention to amend the effect of market failure, has been deeply analysed in the case of scientific research. In this Note we argue that the same point is particularly appropriate also in the case of arts: the presence of information externality concerning the personal skills of artists can represent a valid reason to believe that purely private funding of arts is inefficient, and to call for public intervention in this sector.Arts; Experimentation; Financing; Incomplete Information; Bayes theorem

Cellini, Roberto

Cuccia, Tiziana

English

Research Papers in Economics

Information Externality in the Arts 
and the Public Intervention: 
A Brief Note 
 
ROBERTO CELLINI  - TIZIANA CUCCIA
* 
 
 
 
Abstract 
 
The presence of information externality, and the consequent necessity of public intervention 
to amend the effect of market failure, has been deeply analysed in the case of scientific 
research. In this Note we argue that the same point is particularly appropriate also in the case 
of arts: the presence of information externality concerning the personal skills of artists can 
represent a valid reason to believe that  purely private funding of arts is inefficient, and to 
call for public intervention in this sector.  
 
KEYWORDS. Arts, Experimentation, Financing, Incomplete Information, Bayes theorem. 
 
JEL CLASSIFICATION. C72, Z10. 
 
 
                                           
•  CORRESPONDING AUTHOR: 
Roberto Cellini,  
(University of Catania, Faculty of Economics) 
POSTAL ADDRESS:   Corso Italia, 55 – 95129 Catania ITALY 
E-MAIL:     cellini@unict.it 
TEL.       +39 095375344, +39 339 4914488 (mobile) 
FAX      +39  0957537510 
 
•  COAUTHOR: 
Tiziana Cuccia 
(University of Catania, Faculty of Economics) 
 
  1 Information Externality in the Arts 
and the Public Intervention:  
A Brief Note 
 
 
Abstract - The presence of information externality, and the consequent necessity of public intervention 
to amend the effect of market failure, has been deeply analysed in the case of scientific research. In this 
Note we argue that the same point is particularly appropriate also in the case of arts: the presence of 
information externality concerning the personal skills of artists can represent a valid reason to believe 
that  purely private funding of arts is inefficient, and to call for public intervention in this sector.  
 
 
I. Introduction 
 
In this Letter we suggest that information externality concerning the personal skills of 
individuals is important not only within scientific research –as it is documented by a large 
body of theoretical and empirical literature–  but also in the arts sector. 
 The peculiar information externality, which we are focusing on, derives from the fact 
that the personal skills of an individual are shown by the results obtained when he/she 
receives funds for developing and accomplishing projects: Callon (1994), and more 
specifically Arora and Gambardella (1997) suggest that the results obtained by a scientist are, 
at least partially, a public good. The obtained results can contribute to detect the personal 
skills of a scientist, and to update the probability that he/she is more or less talented. Hence, 
when a subject (and specifically a private institution) decides to finance a scientific project, it 
also contributes to a public good, namely, the information about the skills of the selected 
scientists. This (positive) externality leads to a market failure, so that public intervention is 
necessary to amend the allocation inefficiency. Thus, among many other reasons, the public 
support of scientific research can be motivated by the fact that the private support to scientific 
research is smaller than the social optimal level, since private financiers do not take into 
account the information externality provided by the result obtained by scientists, concerning 
their different abilities and skills. Consistently, there is empirical evidence that private 
financing institutions prefer to engage well-known scientists, the personal skills of whom are 
known, rather than young researchers; moreover, the publicly financed programmes involve a 
wider range of scientists and research lines (Merton, 1988, Dasgupta and David, 1994, inter 
alia).  
Here we argue that the same points can apply to the case of artists. When an 
appointment is given to an artist (as well as to a scientist), his/her results provide information 
about personal skills. This piece of information is a public good, so that, especially at the first 
  2 stages of the professional activity, financing artistic (as well as scientific) activities also 
produces a public good. For this reason, the public intervention can be necessary to overcome 
the inefficiency generated by a purely private financing of arts. As a matter of fact, private 
corporations generally prefer to support activity of well-known artists (Throsby, 1994, 2001; 
Frey, 1997); this is inefficient from a social welfare perspective, since it does not provide 
information about the skills of younger artists, and limits the variety of artistic expressions 
receiving financial support. 
The interaction between financiers and artists is a crucial issue in cultural economics; 
this issue is investigated in a number of contributions; see, e.g., Caves (2000), Throsby 
(2001), Cellini and Cuccia (2003). In the present paper we make the specific point that the 
presence of information externality in financing the arts represents a valid reason to invoke 
the public intervention in these markets. Section 2 provides a formal model which strictly 
follows the paper of Arora and Gambardella (1997) on scientific research. Section 3 
comments and concludes.  
 
 
II. The model 
 
The relationships between artists and private financiers take place over time (more precisely, 
are dynamic) and are characterised by asymmetric information. We take into account these 
two aspects, by considering a two-stage set-up with incomplete information. 
In each stage, any artist proposes to a financier one project. The artistic project  entails 
a cost C, 0<C<1, and –if funded– can be successful (S) or not (F). The economic return of a 
successful project is 1, while the economic return to a failure is 0.  
We assume that any artist can be “talented” (T) or “talentless” (U). The ex-ante 
probability that an artist is talented is equal to x, with 0<x<1. 
Let Prob(S,x) be the probability of success of an artist who is believed to be talented 
with probability x. Hence, in a one-shot framework, the expected return associated to the 
financing of a project would be Prob(S,x)-C. 
It is obvious to assume that Prob(S | T)>Prob(S | U), that is, the probability of 
successful project is higher for talented artists.  
In a dynamic framework, financiers can update the probability about the real skill of 
an artist, by looking at her/his past results. The Bayes rule can be used to this end. In 
  3 particular it is obvious to assume: Prob (T | S)=y>x, that is, the observation of a success 
obtained by a given artist leads to increase the probability that he/she is talented. 
Let us focus on the two-stage framework. Denote by S' the success in the second 
stage, provided that success occurred in the first stage. 
The total expected payoff of funding today present and future artistic projects: 
 
Prob(S,x)-C+[Prob (S',y)-C][Prob(S,x)] 
 
(This derives from the facts that no funds are given in the second stage, if the artists failed in 
the first stage, which happens with probability 1-Prob(S,x)).  
It is simple to prove that this expression is increasing in x (see Arora and 
Gambardella, 1994, footnote 8): the higher the subjective probability to be a talented artist, 
the higher the expected payoff from funding him/her. Moreover, a threshold level x* exists, 
such that the expected payoff is positive. Only the artists for which x>x* will be funded, 
provided that the financier behaves on the basis of the expected profit. 
 
So far, we have assumed that the artist who receives funds in the first period, applies also for 
funds in the second period to the same financier. This assumption can be appropriate if one 
thinks that the financiers is a "planner", taking a social perspective. However, if the financier 
is a private subject, it can not be sure of hiring the artist also in the second stage, provided that 
it funded the artist in the first stage and the result was successful.  
Again following Arora and Gambardella (1997), we assume that in period 2 the 
private financier can hire the same successful artist funded in period 1, with probability q. 
Hence, the total expected payoff for a private financier from funding an artist is in this case 
 
Prob(S,x)-C+q[Prob(S',y)-C][Prob(S,x)] 
 
This function increases with x, and a threshold level of x exist, x^, above which the 
expected payoff is positive. However, 0<q<1 implies x^>x*. This means that a private 
financing subject chooses artists to be funded, with higher prior probability of being talented, 
as compared to financing subject taking a social perspective. In other words, private 
financiers are more likely to hire "stars". Thus, the existence of the information 
  4 incompleteness is among the reasons of the existence of "superstar" phenomena (Rosen, 
1981; Adler, 1985).  
The intuition behind the model is very simple: the financial support to artist creates an 
information externality problem. The private financier is not sure of being able to hire the 
artist again in the future. Provided that the result obtained in the first period is public 
knowledge, with probability (1-q) the financier produces an information useful for a different 
subject, and specifically for the financier that will hire the artist in the subsequent stage. 
Hence, private financiers have smaller incentives that public agencies to fund artistic projects, 
especially when the skills of an artist are unknown: private financier have more incentive to 
fund well-established artists than young artists. 
The same argument used by Dasgupta and David (1994) and more specifically by 
Arora and Gambardella (1997) to invoke public patronage of scientific research can be used 
to provide a rational basis for public support to artistic activities: there is a social value in 
financing artistic projects, to generate more information about artists' skills.  
 
 
III. Concluding remarks 
 
We are aware that a large set of different motivations play a role in shaping the relationship 
between artists and financiers. A wide body of literature focuses on the choice of funding arts 
(Throsby, 2001,  Towse, 2001). A different research line deals with the choice of artists about 
the experimentation content of their works, and the consequences in terms of economic 
returns for the financiers (Mc Cain, 1979, Frey, 1997, Cowen and Tabarrock, 2000, Cellini 
and Cuccia, 2003). Finally, several contributions provide support to the necessity of public 
intervention in the arts, basing on the story of Baumol’s cost disease (Baumol and Bowen, 
1965, 1966; for a review, see Throsby, 1994 or more recently   Heilbrun, 2003). We have not 
dealt with these points in the present Note.  
Simply, we have shown that the information externality can be an important 
phenomenon in the choice of financing arts projects. Its presence can help explain the 
superstar phenomenon, and, more importantly, can represent a rationale for asking for public 
support of artistic activities.  
A purely private funding of the arts gives rise to self-reinforcing mechanisms: private 
financiers have incentives to fund only well-known artists; they builds up and strengthen their 
personal reputation, which increases their probability of receiving funds in subsequent stages. 
  5 Moreover, private funding of arts gives rise to a sub-optimal level of investment in 
exploring the skills of younger artists, precisely because the information externality is not 
properly taken into account by private financing institutions. 
 
 
References 
 
Adler, M. (1985) “Stardom and Talents” American Economic Review 75, 208-212. 
 
Arora, A., and A. Gambardella (1997) “Public Policy Toward Science: Picking Stars or 
Spreading the Wealth?” Revue d'economie industrialle 79, 63-75. 
 
Baumol, W. J., and W. G. Bowen (1965) “On the Performing Arts: the Anatomy of their 
Problems” American Economic Review Papers and Proceedings 55, 495-502. 
 
Baumol, W. J., and W. G. Bowen (1966) Performing Art - The Economic Dilemma, 
Twentieth Century Fund: Cambridge, Ma, USA. 
 
Callon, M. (1994), “Is Science a public good?” Science Technology and Human Values 19, 
395-424. 
 
Caves R. E. (2000)  Creative Industries : Contracts between Art and Commerce, Harvard 
University Press: Cambridge, Ma, USA. 
 
Cellini, R., and  T. Cuccia (2003) “Experimentation in the Arts: A Game Theory Approach” 
Economia Politica 20, 21-34. 
 
Cowen, T., and A. Tabarrok  (2000) “An Economic Theory of Avant-Garde and Popular Art, 
or High and Low Culture” Southern Economic Journal 67, 232-253. 
 
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Frey, B. S. (1997) Not Just for the Money, Edward Edgar: Cheltenham, UK. 
 
Heilbrun, J. (2003) “Baumol’s cost disease” in A Handbook of Cultural Economics by R. 
Towse, Ed., Edward Elgar: Cheltenham, UK, 91-101.  
 
Mc Caine, R (1979) “Reflections on the Cultivation of Taste” Journal of Cultural Economics 
3, 30-52. 
 
Mc Caine, R (1986) “Game Theory and Cultivation of Taste” Journal of Cultural Economics 
10, 1-15. 
 
Merton, R. (1988) “The Matthew Effect in Science: Cumulative Advantage and the 
Symbolism of Intellectual property” Isis 79, 606-23. 
  
Rosen, S. (1981), “The Economics of Superstar” American Economic Review 71, 845-858. 
  6  
Towse, R. (2001), “Partly for the Money: Rewards and Incentives to Artists” Kyklos 54, 473-
490. 
 
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  7 

Information externality in the arts and the public intervention: a brief note

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