The aggregate impacts of tournament incentives in experimental asset markets
- 227 Downloads
We examine how rewards and penalties under tournament incentives impact price behaviour in experimental asset markets. Adding a penalty to a reward-only contract, or a reward to a penalty-only contract, changes the traders’ behaviour. The experimental markets with adjusted contracts experience less trading, but longer-lived and larger bubbles. This observed effect of penalties is consistent with herd-driven behaviour under relative performance evaluation, while the effect of rewards reflects the influence of the convexity of bonuses. However, these effects dissipate with trader experience. Our findings contribute to the debate attributing market instability to incentive structures in the finance industry.
KeywordsTournaments Relative performance evaluation Bubbles Experimental asset market Convex incentives Herding
JEL ClassificationC92 G12 J33 M52
The authors would like to thank two anonymous referees and Charles Noursair (the editor) for suggestions. We also thank David Feldman, Thomas Henker, Jeremy Clark, Kenan Kalayci and session participants at the 2015 Experimental Finance Meeting, the 2015 European Financial Management Association meeting, and the UNSW brown bag and seminar participants at the University of Maine and the University of Tasmania for helpful comments. We gratefully acknowledge financial support provided by the Australian Research Council (ARC DECRA Grant Number: DE120101523).
- Bebchuk, L. A., & Spamann, H. (2009). Regulating bankers’ pay. Georgetown Law Journal, 98, 247.Google Scholar
- Blais, A.-R., & Weber, E. U. (2006). A Domain-Specific Risk-Taking (DOSPERT) scale for adult populations. Judgment and Decision Making, 1(1), 33.Google Scholar
- Blinder, A. S. (2009). Crazy compensation and the crisis. The Wall Street Journal, http://www.wsj.com/articles/SB124346974150760597. Accessed 16 January 2015.
- King, R., Smith, V. L., Williams, A. W., & Boening, M. V. (1993). The robustness of bubbles and crashes in experimental stock markets. In R. Day & P. Chen (Eds.), Non linear dynamics and evolutionary economics (pp. 183–2999). Oxford: Oxford Press.Google Scholar
- Rajan, R. G. (2008). Bankers’ pay is deeply flawed. Financial Times. http://www.ft.com/intl/cms/s/0/18895dea-be06-11dc-8bc9-0000779fd2ac.html#axzz3T9uTJuUR. Accessed 16 January 2015.
- Robin, S., Straznicka, K., & Villeval, M. (2012). Bubbles and incentives: An experiment on asset markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2197754.
- Smith, V. L., van Boening, M., & Wellford, C. P. (2000). Dividend timing and behavior in laboratory asset markets. Economic Theory, 16(3), 567–583.Google Scholar