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The aggregate impacts of tournament incentives in experimental asset markets

Published online by Cambridge University Press:  14 March 2025

Debapriya Jojo Paul*
Affiliation:
Department of Finance, London School of Economics and Political Science, OLD M2.08, Old Building, Houghton St, London WC2A 2AE, UK
Julia Henker*
Affiliation:
Faculty of Business, Bond University, Robina, QLD 4229, Australia
Sian Owen
Affiliation:
Performance Audit Team, Audit Office of New South Wales, Sydney, NSW 2000, Australia

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.

Type
Original Paper
Copyright
Copyright © 2018 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-018-9562-7) contains supplementary material, which is available to authorized users.

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