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
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Citations: View citations in EconPapers (23)

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Working Paper: Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets (2012)
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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

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