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

Holmén, Martin,1966Gothenburg University,Göteborgs universitet,Centrum för finans,Institutionen för nationalekonomi med statistik,Centre for Finance,Department of Economics (author)

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. © 2014 Elsevier B.V.

Kirchler, Michael,1977Gothenburg University,Göteborgs universitet,Institutionen för nationalekonomi med statistik,Centrum för finans,Department of Economics,Centre for Finance(Swepub:gu)xkirmi (author)
Kleinlercher, Daniel (author)
Göteborgs universitetCentrum för finans (creator_code:org_t)

By the author/editor: Holmén, Martin, ...; Kirchler, Michae ...; Kleinlercher, Da ...

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