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The aggregate impacts of tournament incentives in experimental asset markets

Author

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  • Debapriya Jojo Paul

    (London School of Economics and Political Science)

  • Julia Henker

    (Bond University)

  • Sian Owen

    (Audit Office of New South Wales)

Abstract

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.

Suggested Citation

  • Debapriya Jojo Paul & Julia Henker & Sian Owen, 2019. "The aggregate impacts of tournament incentives in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(2), pages 441-476, June.
    • Handle: RePEc:kap:expeco:v:22:y:2019:i:2:d:10.1007_s10683-018-9562-7
    DOI: 10.1007/s10683-018-9562-7
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    More about this item

    Keywords

    Tournaments; Relative performance evaluation; Bubbles; Experimental asset market; Convex incentives; Herding;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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