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.
(i) We observe that option-like incentives induce significantly higher
market prices 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.
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.
(i) We observe that option-like incentives induce significantly higher
market prices 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.
| Original language | English |
|---|---|
| Title of host publication | Financial Management Association European Conference |
| Publication date | 2012 |
| Publication status | Published - 2012 |
| MoE publication type | A4 Article in conference proceedings |
| Event | 2012 European Conference of Financial Management Association (FMA) - Istanbul , Turkey Duration: 06.06.2012 → 08.06.2012 |
Keywords
- 511 Economics