Do Option-Like Incentives Induce Overvaluation? Evidence from Exerimental Asset Markets

37 Pages Posted: 23 Jan 2013

See all articles by Martin Holmen

Martin Holmen

University of Gothenburg - Department of Economics; University of Gothenburg - Centre for Finance

Michael Kirchler

University of Innsbruck

Daniel Kleinlercher

University of Innsbruck

Date Written: January 23, 2013

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. We observe (i) that option-like incentives induce significantly higher market prices than linear incentives. We further find that (ii) option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. We finally show that (iii) trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.

Keywords: Mispricing, incentives, market efficiency, experimental finance

JEL Classification: C92, D84, G10

Suggested Citation

Holmen, Martin and Kirchler, Michael and Kleinlercher, Daniel, Do Option-Like Incentives Induce Overvaluation? Evidence from Exerimental Asset Markets (January 23, 2013). Available at SSRN: https://ssrn.com/abstract=2205587 or http://dx.doi.org/10.2139/ssrn.2205587

Martin Holmen (Contact Author)

University of Gothenburg - Department of Economics ( email )

School of Business, Economics and Law
Box 640
Gothenburg, 40530
Sweden
+46 31 786 6442 (Phone)
+46 31 7865114 (Fax)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Michael Kirchler

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Daniel Kleinlercher

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

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