EconPapers    
Economics at your fingertips  
 

Do option-like incentives induce overvaluation? Evidence from experimental asset markets

Martin Holmen, Michael Kirchler and Daniel Kleinlercher

Journal of Economic Dynamics and Control, 2014, vol. 40, issue C, 179-194

Abstract: One potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option-like incentive schemes in financial institutions. By running laboratory asset markets, we investigate the impact of option-like incentives on price formation and trading behavior. The main results are that (i) we observe significantly higher market prices with option-like incentives than linear incentives. (ii) We further find that option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. (iii) We finally show that trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.

Keywords: Mispricing; Incentives; Market efficiency; Experimental finance (search for similar items in EconPapers)
JEL-codes: C92 D84 G10 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188914000116
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:40:y:2014:i:c:p:179-194

DOI: 10.1016/j.jedc.2014.01.002

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-08-04
Handle: RePEc:eee:dyncon:v:40:y:2014:i:c:p:179-194