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The aggregate impacts of tournament incentives in experimental asset markets

Debapriya Jojo Paul (), Julia Henker () and Sian Owen
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Debapriya Jojo Paul: London School of Economics and Political Science
Julia Henker: Bond University

Experimental Economics, 2019, vol. 22, issue 2, 441-476

Abstract: Abstract We examine how rewards and penalties under tournament incentives impact price behaviour in experimental asset markets. Adding a penalty to a reward-only contract, or a reward to a penalty-only contract, changes the traders’ behaviour. The experimental markets with adjusted contracts experience less trading, but longer-lived and larger bubbles. This observed effect of penalties is consistent with herd-driven behaviour under relative performance evaluation, while the effect of rewards reflects the influence of the convexity of bonuses. However, these effects dissipate with trader experience. Our findings contribute to the debate attributing market instability to incentive structures in the finance industry.

Keywords: Tournaments; Relative performance evaluation; Bubbles; Experimental asset market; Convex incentives; Herding (search for similar items in EconPapers)
JEL-codes: C92 G12 J33 M52 (search for similar items in EconPapers)
Date: 2019
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