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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 ,
Julia Henker Open the ORCID record for Julia Henker [Opens in a new window]  and
Sian Owen
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
*
d.j.paul@lse.ac.uk
jhenker@bond.edu.au
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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.

Keywords

TournamentsRelative performance evaluationBubblesExperimental asset marketConvex incentivesHerding

JEL classification

G12: Asset Pricing • Trading Volume • Bond Interest Rates J33: Compensation Packages • Payment Methods M52: Compensation and Compensation Methods and Their Effects C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 22 , Issue 2 , 15 June 2019 , pp. 441 - 476
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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