Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098556 | Journal of Economic Dynamics and Control | 2014 | 16 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Martin Holmen, Michael Kirchler, Daniel Kleinlercher,