The aggregate impacts of tournament incentives in experimental asset markets

Julia Henker, Debapriya Paul, Sian Owen

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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.
Original languageEnglish
Pages (from-to)441-476
Number of pages36
JournalExperimental Economics
Volume22
Issue number2
Early online date3 Feb 2018
DOIs
Publication statusPublished - 15 Jun 2019

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Tournament
Experimental asset markets
Incentives
Penalty
Reward
Industry
Price impact
Finance
Convexity
Relative performance evaluation
Bonuses
Bubble
Traders
Experimental markets
Trader behavior
Incentive structure

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Henker, Julia ; Paul, Debapriya ; Owen, Sian. / The aggregate impacts of tournament incentives in experimental asset markets. In: Experimental Economics. 2019 ; Vol. 22, No. 2. pp. 441-476.
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The aggregate impacts of tournament incentives in experimental asset markets. / Henker, Julia; Paul, Debapriya; Owen, Sian.

In: Experimental Economics, Vol. 22, No. 2, 15.06.2019, p. 441-476.

Research output: Contribution to journalArticleResearchpeer-review

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