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Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets

Martin Holmen, Michael Kirchler and Daniel Kleinlercher ()
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Daniel Kleinlercher: University of Innsbruck, Postal: Dept of Banking and Finance, Universitätsstrasse 15, A 6020 INNSBRUCK, Austria

No 540, Working Papers in Economics from University of Gothenburg, Department of Economics

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. We observe (i) that option-like incentives induce significantly higher market prices than linear incentives. We further find that (ii) option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. We finally show that (iii) 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)
Pages: 38 pages
Date: 2012-09-18, Revised 2012-11-21
New Economics Papers: this item is included in nep-exp
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Journal Article: Do option-like incentives induce overvaluation? Evidence from experimental asset markets (2014) Downloads
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