TY  - UNPD
A1  - Baghestanian, Sascha
A1  - Gortner, Paul J.
A1  - Massenot, Baptiste
T1  - Compensation schemes, liquidity provision, and asset prices: an experimental analysis
T2  - SAFE working paper series ; No. 108
N2  - In an experimental setting in which investors can entrust their money to traders, we investigate how compensation schemes affect liquidity provision and asset prices. Investors face a trade-off between risk and return. At the benefit of a potentially higher return, they can entrust their money to a trader. However this investment is risky, as the trader might not be trustworthy. Alternatively, they can opt for a safe but low return. We study how subjects solve this trade-off when traders are either liable for losses or not, and when their bonuses are either capped or not. Limited liability introduces a conflict of interest because it makes traders value the asset more than investors. To limit losses, investors should thus restrict liquidity provision to force traders to trade at a lower price. By contrast, bonus caps make traders value the asset less than investors. This should encourage liquidity provision and decrease prices. In contrast to these predictions, we find that under limited liability investors contribute to asset price bubbles by increasing liquidity provision and that caps fail to tame bubbles. Overall, giving investors skin in the game fosters financial stability.
T3  - SAFE working paper - 108 
KW  - compensation
KW  - liquidity
KW  - experimental asset markets
KW  - bubbles
Y1  - 2015
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/37796
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-377966
UR  - http://ssrn.com/abstract=2613432
IS  - 1st June 2015
PB  - SAFE
CY  - Frankfurt am Main
ER  -