Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 540: Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets
Martin Holmén (), Michael Kirchler () and Daniel Kleinlercher ()
Additional contact information
Martin Holmén: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 GÖTEBORG, Sweden, , also: Hanken School of Economics, Dept of Finance and Statistics, Arkadiagatan 22, SF-00101 Helsinki, Finland
Michael Kirchler: University of Innsbruck and University of Gothenburg, Postal: Department of Banking and Finance, Universitätsstrasse 15, A 6020 INNSBRUCK, Austria, , and, , Dept of Economics, Centre of Finance, P.O.Box 640, SE 405 30 GoTHENBURG, Sweden,
Daniel Kleinlercher: University of Innsbruck, Postal: Dept of Banking and Finance, Universitätsstrasse 15, A 6020 INNSBRUCK, Austria
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
38 pages, First version: September 18, 2012. Revised: November 21, 2012.
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