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The impact of different incentive schemes on asset prices

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  • Kleinlercher, Daniel
  • Huber, Jürgen
  • Kirchler, Michael

Abstract

How people are incentivized is one of the main drivers of how they behave. In laboratory asset markets we evaluate the impact of four trader incentive bonus, bonus with cap, linear, and penalty – on asset prices and trader behavior. We find that (i) an asset with identical expected dividend shows price levels which differ by more than 100 percent depending on the incentive scheme subjects face. In particular, prices of markets populated by subjects with bonus incentives show the highest prices, whereas those with penalty-like incentivized subjects exhibit the lowest. (ii) However, subjects act approximately rational as different incentives generate different optimal price levels. (iii) In markets where different subjects have different incentive schemes we find that those with bonus incentives exhibit a riskier investment behavior and prefer the riskier asset, whereas subjects with penalty incentives invest conservatively and mainly hold cash. Since we find no difference in risk attitude of subjects prior to the experiment, differences in investment behavior are induced by the applied incentives. Our results highlight that incentives on financial markets have a huge impact on asset prices and investment behavior.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:eecrev:v:68:y:2014:i:c:p:137-150
    DOI: 10.1016/j.euroecorev.2014.02.010
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    References listed on IDEAS

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    Cited by:

    1. repec:spr:decfin:v:40:y:2017:i:1:d:10.1007_s10203-017-0200-1 is not listed on IDEAS
    2. Sutter, Matthias & Huber, Jürgen & Kirchler, Michael & Stefan, Matthias, 2016. "Where to Look for the Morals in Markets?," IZA Discussion Papers 10105, Institute for the Study of Labor (IZA).
    3. Utz Weitzel & Christoph Huber & Florian Lindner & Jürgen Huber & Julia Rose & Michael Kirchler, 2018. "Bubbles and financial professionals," Working Papers 2018-04, Faculty of Economics and Statistics, University of Innsbruck, revised Jun 2018.
    4. Stefan Palan & Thomas Stöckl, 2014. "When chasing the offender hurts the victim: Collateral damage from insider legislation," Working Paper Series, Social and Economic Sciences 2014-03, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    5. Baghestanian, Sascha & Gortner, Paul & Massenot, Baptiste, 2015. "Compensation schemes, liquidity provision, and asset prices: An experimental analysis," SAFE Working Paper Series 108, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    6. Kirchler, Michael & Bonn, Caroline & Huber, Jürgen & Razen, Michael, 2015. "The “inflow-effect”—Trader inflow and price efficiency," European Economic Review, Elsevier, vol. 77(C), pages 1-19.
    7. repec:kap:expeco:v:20:y:2017:i:2:d:10.1007_s10683-016-9493-0 is not listed on IDEAS
    8. Michael Kirchler & Florian Lindner & Utz Weitzel, 2018. "Delegated decision making and social competition in the finance industry," Working Papers 2018-07, Faculty of Economics and Statistics, University of Innsbruck.
    9. Stefan Palan, 2014. "A Software for Asset Market Experiments," Working Paper Series, Social and Economic Sciences 2014-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    10. repec:kap:expeco:v:21:y:2018:i:1:d:10.1007_s10683-017-9530-7 is not listed on IDEAS
    11. repec:eee:finmar:v:35:y:2017:i:c:p:104-129 is not listed on IDEAS
    12. Annalisa Fabretti & Tommy Gärling & Stefano Herzel & Martin Holmen, 2017. "Convex incentives in financial markets: an agent-based analysis," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 40(1), pages 375-395, November.
    13. Fang, Dawei & Holmén, Martin & Kleinlercher, Daniel & Kirchler, Michael, 2017. "How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 1-27.

    More about this item

    Keywords

    Incentives; Trading behavior; Market efficiency; Experimental finance;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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