Private value components, and the winner's curse in an art index

Does the private value component of art induce buyers to overpay for paintings? We model this as a type of ‘winner's curse’. Private values imply that prices depend upon the potential number of bidders, a number which declines immediately following a sale. A modified repeat sales regression allows for both temporal and private value returns to painting investments. The temporal component represents the evolving capital appreciation of a painting through time. The private value component originates from changes in the maximum private valuation through time. Preliminary results of this return decomposition indicate that the private value return may be significant and positive. The paper explores the further implications of a private value return, including its possible biassing effect upon the capital appreciation index resulting from the repeat sales regression.