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Bubbles and Incentives : An Experiment on Asset Markets

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  • Stéphane Robin

    ()
    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

  • Katerina Straznicka

    ()
    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

  • Marie Claire Villeval

    ()
    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

Abstract

We explore the effects of competitive incentives and of their time horizon on the evolution of both asset prices and trading activity in experimental asset markets. We compare i) a no-bonus treatment based on Smith, Suchanek and Williams (1988) ; ii) a short-term bonus treatment in which bonuses are assigned to the best performers at the end of each trading period ; iii) a long-term bonus treatment in which bonuses are assigned to the best performers at the end of the 15 periods of the market. We find that the existence of bonus contracts does not increase the likelihood of bubbles but it affects their severity, depending on the time horizon of bonuses. Markets with long-term bonus contracts experience lower price deviations and a lower turnover of assets than markets with either no bonuses or long-term bonus contracts. Short-term bonus contracts increase price deviations but only when markets include a higher share of male traders. At the individual level, the introduction of bonus contracts increases the trading activity of males, probably due to their higher competitiveness. Finally, both mispricing and asset turnover are lower when the pool of traders is more risk-averse.

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 1235.

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Date of creation: 2012
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Handle: RePEc:gat:wpaper:1235

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Keywords: Asset market; bubbles; incentives; bonuses; risk attitudes; experiment;

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References

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Blog mentions

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  1. Inequality's effects
    by chris dillow in Stumbling and Mumbling on 2013-01-22 14:21:04
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Cited by:
  1. Kleinlercher, Daniel & Huber, Jürgen & Kirchler, Michael, 2014. "The impact of different incentive schemes on asset prices," European Economic Review, Elsevier, vol. 68(C), pages 137-150.
  2. Cheung, Stephen L. & Coleman, Andrew, 2012. "League-Table Incentives and Price Bubbles in Experimental Asset Markets," Working Papers 2012-13, University of Sydney, School of Economics.

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