An Empirical Study of Investment Externalities: The Case of Albums by the Same Recording Artist

Joint with: Alan Sorensen - Stanford University

This paper studies the role of investment externalities on the career of a recording artist. We show that a new album increases sales of the old albums, and the increase is substantial and permanent. The externality is potentially a barrier to entry. It prevents artists from switching

distributors and mitigates the distributor’s hold-up problem. We show that the externality is mainly associated with first-time hits, which suggests that the source of the externality is informational and not preference complementarities.

For more information, contact Jere Behrman.