the effectiveness of keynes tobin transaction taxes when heterogeneous agents can trade in different markets a behavioral finance approach abstract we develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets whether an agent trades and if so in which market with which strategy depends on profit considerations as it turns out an ongoing evolutionary competition between the trading strategies causes complex price dynamics which closely resembles the behavior of actual speculative prices moreover we find that if the agents have to pay a transaction tax in one market price variability decreases in this market but increases in the other market however the imposition of a uniform tax on all transactions stabilizes both markets our results suggest that if regulators of a market introduce a transaction tax other markets are likely to follow

the impact of a financial transaction tax on stylized facts of price returns evidence from the lab as the introduction of financial transaction taxes is increasingly discussed by political leaders we explore possible consequences such taxes could have on markets here we examine how stylized facts namely fat tails and volatility clustering are affected by different tax regimes in laboratory experiments we find that leptokurtosis of price returns is highest and clustered volatility is weakest in unilaterally taxed markets where tax havens exist instead tails are slimmest and volatility clustering is strongest in tax havens when an encompassing financial transaction tax is levied stylized facts hardly change compared to a scenario with no tax on all markets

the economic consequences of a tobin tax an experimental analysis abstract the effects of a tobin tax on foreign exchange markets have long been disputed we present an experiment with currency trading on two markets where either none one or both markets are taxed our results confirm the hitherto undisputed issues a tax reduces trading volume shifts market share to untaxed markets and leads to negligible tax revenues if tax havens exist concerning the controversial issues we find that i volatility effects depend on the existence of tax havens and on market size ii market efficiency decreases in taxed markets when tax havens exist and iii short term speculation is reduced

the role of transaction costs for financial volatility evidence from the paris bourse this paper analyzes the causal linkage between transaction costs and financial volatility under two methodological improvements over the existing literature first we use panel data in which exogenous transaction cost differences in the french stock market are induced by price level dependent minimum price variation rules tick size rules unlike in previous studies based on one time regulatory tick size changes like the u s decimalization we can separately identify and control for marketwide volatility changes second we avoid the pitfalls of biased volatility measurement across regimes by using the range as a tick size robust volatility metric panel regressions controlling for marketwide volatility effects show at high levels of statistical significance that the hourly range volatility of individual stocks increases by more than 30 for a 20 exogenous increase in transaction costs due to tick size variations in the french trading system in the light of this evidence higher transaction costs in general and security transaction taxes in particular should be considered as volatility increasing jel f3 g1 g14

the impact of different incentive schemes on asset prices abstract how people are incentivized is one of the main drivers of how they behave in laboratory asset markets we evaluate the impact of four trader incentive bonus bonus with cap linear and penalty on asset prices and trader behavior we find that i an asset with identical expected dividend shows price levels which differ by more than 100 percent depending on the incentive scheme subjects face in particular prices of markets populated by subjects with bonus incentives show the highest prices whereas those with penalty like incentivized subjects exhibit the lowest ii however subjects act approximately rational as different incentives generate different optimal price levels iii in markets where different subjects have different incentive schemes we find that those with bonus incentives exhibit a riskier investment behavior and prefer the riskier asset whereas subjects with penalty incentives invest conservatively and mainly hold cash since we find no difference in risk attitude of subjects prior to the experiment differences in investment behavior are induced by the applied incentives our results highlight that incentives on financial markets have a huge impact on asset prices and investment behavior

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

portfolio optimization with tracking error constraints this article explores the risk and return relationship of active portfolios subject to a constraint on tracking error volatility tev which can also be interpreted in terms of value at risk such a constrained portfolio is the typical setup for active managers who are given the task of beating a benchmark the problem with this setup is that the portfolio manager pays no attention to total portfolio risk which results in seriously inefficient portfolios unless some additional constraints are imposed the development in this article shows that tev constrained portfolios are described by an ellipse on the traditional mean variance plane this finding yields a number of new insights because of the flat shape of this ellipse adding a constraint on total portfolio volatility can substantially improve the performance of the active portfolio in general plan sponsors should concentrate on controlling total portfolio risk

thar she bursts reducing confusion reduces bubbles to explore why bubbles frequently emerge in the experimental asset market model of smith suchanek and williams 1988 we vary the fundamental value process constant or declining and the cash to asset value ratio constant or increasing we observe high mispricing in treatments with a declining fundamental value while overvaluation emerges when coupled with an increasing c a ratio a questionnaire reveals that the declining fundamental value process confuses subjects as they expect the fundamental value to stay constant running the experiment with a different context stocks of a depletable gold mine instead of stocks significantly reduces mispricing and overvaluation as it reduces confusion jel c91 d14 g11 g12

effects of capital controls on foreign exchange liquidity abstract this paper investigates from a theoretical and empirical perspective the effects of capital controls on cost based measures of foreign exchange fx market liquidity first we propose a market microstructure model of the exchange rate where capital controls reduce the trades of constrained dealers the effect is a tightening of the effective spread which increases market liquidity then we propose a new measure of capital account restrictiveness that in contrast to other traditional measures can account for intensive changes in capital controls policies using this measure in a panel of emerging market economies we provide empirical evidence showing that capital controls can reduce the implicit cost component of fx market liquidity

input demand under yield and revenue insurance previous studies disagree on the effects of insurance on fertilizer application rates the effect of increased fertilizer on the probability of low yields primarily determines whether fertilizer and insurance are substitutes or complements we estimate conditional distributions of corn yields to determine if the technical relationship between yields and fertilizer supports the hypothesis that insurance increases optimal application rates our results indicate no support for this hypothesis at all nitrogen fertilizer rates and reasonable levels of risk aversion nitrogen fertilizer and insurance are substitutes suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications

an expected indemnity approach to the measurement of moral hazard in crop insurance a definition of moral hazard in multiple peril crop insurance is proposed that focuses on expected indemnities rather than input use five years of production and insurance data for a panel of kansas wheat farms is used to empirically test for this type of moral hazard results suggest that moral hazard affects multiple peril crop insurance indemnities in poor production years but that no significant moral hazard occurs in years when growing conditions are favorable

probability judgment error and speculation in laboratory asset market bubbles in 12 sessions conducted in a typical bubble generating experimental environment we design a pair of assets that can detect both irrationality and speculative behavior the specific form of irrationality we investigate is the probability judgment error associated with lowprobability high payoff outcomes independently we test for speculation by comparing prices of identically paying assets in multiperiod versus single period markets we establish that aggregate irrationality measured in one dimension probability judgment error is associated with aggregate irrationality measured in another bubble formation

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

market microstructure matters when imposing a tobin tax evidence from the lab trading in fx markets is dominated by two microstructures exchanges with market makers and otc markets without market makers using laboratory experiments we test whether the impact of a tobin tax is different in these two market microstructures we find that i in markets without market makers an unilaterally imposed tobin tax i e a tax haven exists increases volatility ii in contrast in markets with market makers we observe a decrease in volatility in unilaterally taxed markets iii an encompassing tobin tax has no impact on volatility in either setting efficiency does not vary significantly across tax regimes

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

input use decisions with greater information on crop conditions implications for insurance moral hazard and the environment emerging precision agriculture technologies allow farms to make input decisions with greater information on crop conditions this greater information occurs by providing improved predictions of crop yields using remote sensing and crop simulation models and by allowing farms to apply inputs within the growing season when some crop conditions are already realized we use a stylized model with uncertainty in yield and price to examine how greater information on crop conditions i e a forecast affects input use for insured and uninsured farms we show that moral hazard decreases farms apply more inputs as the forecast accuracy improves when the forecast indicates good yields and vice versa when the forecast indicates bad yields in the long run moral hazard decreases in response to an improvement in forecast accuracy even though moral hazard decreases in the long run indemnity payments are likely to increase in the long run driven by the increase in moral hazard when the forecast indicates bad crop conditions we use the results of our model to discuss the potential impact of different technologies and types of inputs on the federal crop insurance program and the environment

neglected risks financial innovation and financial fragility abstract we present a standard model of financial innovation in which intermediaries engineer securities with cash flows that investors seek but modify two assumptions first investors and possibly intermediaries neglect certain unlikely risks second investors demand securities with safe cash flows financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks because the risks are neglected security issuance is excessive as investors eventually recognize these risks they fly back to the safety of traditional securities and markets become fragile even without leverage precisely because the volume of new claims is excessive

modeling heterogeneous farm responses to european union biofuel support with a random parameter multicrop model although there is now widespread evidence of substantial variability in economic agents responses to economic drivers in many applied economics fields this variability has been largely overlooked by econometric agricultural production models this article sets out to fill this gap by providing methodological contributions and empirical results first we consider panel data multicrop models featuring random intercept and slope parameters to account for the heterogeneous responses of crop producers to economic drivers second we show that monte carlo expectation maximization algorithms are particularly well suited to estimating this type of model third based on an application of our empirical modeling framework with a sample of french grain crop producers we demonstrate substantial variability in farmers responses to economic incentives fourth we use the estimated model and a simple statistical calibration procedure to build farm specific simulation models which are then used to evaluate the effects of the rapeseed price increase induced by european union eu biofuel support our simulation results demonstrate that ignoring the variability in the considered farmers responses to the economic incentives results in significant overestimation of the increases in rapeseed yield levels and variable input use levels induced by eu biofuel support as well as significant underestimation of the variability in the congruent increases in rapeseed acreages

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

securities transaction taxes an overview of costs benefits and unresolved questions many major developed countries including germany japan and the united kingdom have some form of tax on securities transactions the clinton administration recently considered imposing fees of from 14 on transactions in futures contracts past budgets have considered fees of from 6 to 15 proponents of a securities transaction tax in the u s argue that it would tap into a significant source of revenues and would in addition act to reduce excess volatility in securities markets by discouraging speculative and noise trading some have argued that it would also increase investors expected holding periods hence encourage corporate managers to build for the long term opponents argue that any benefits from such a tax would be overwhelmed by its costs they point out that a tax on transactions would increase the cost of capital reduce market liquidity and bring down security values furthermore as the tax would change the relative costs of holding and issuing different classes of securities it might be expected to change capital structures and investment portfolios too at its worst a securities transaction tax could drive trading in some securities to overseas markets not burdened by taxation the economic and societal distortions resulting from taxation and avoidance would likely be large

some effects of transaction taxes under different microstructures we show that the effectiveness of transaction taxes depends on the market microstructure within our model heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders in addition they may become inactive if the profitability of trading decreases we find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order in a dealership market however abundant liquidity is provided by specialists and thus a transaction tax may reduce volatility by crowding out speculative orders

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

relative performance incentives and price bubbles in experimental asset markets we study experimental markets in which participants face incentives modeled upon those prevailing in markets for managed funds each participant s portfolio is periodically evaluated at market value and ranked by relative performance as measured by short term paper returns those who rank highly attract a larger share of new fund inflows in an environment in which prices are typically close to intrinsic value the effect of these incentives is mild however in an environment in which markets are prone to bubble mispricing is greatly exacerbated by relative performance incentives and becomes even more pronounced with experience

digital options and efficiency in experimental asset markets abstract in asset markets extraordinary price run ups bubbles followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy leading to inefficient resource allocation and underinvestment conversely derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset we combine these observations and test experimentally whether digital options a type of derivative that has recently been introduced to a wider audience via online prediction markets can reduce price bubbles in a laboratory setting we find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result

fee speech signaling risk sharing and the impact of fee structures on investor welfare the fee structure used to compensate investment advisers is central to the study of fund design and affects investor welfare in at least three ways i by influencing the portfolioselection incentives of the adviser ii by affecting risk sharing between adviser and investor and iii through its use as a signal of quality by superior investment advisers in this paper we describe a model in which all of these features are present and use it to compare two popular and contrasting forms of fee contracts the fulcrum and the incentive types from the standpoint of investor welfare while the former has some undeniably attractive features that have in particular been used by regulators to justify its mandatory use in a mutual fund context we find surprisingly that it is the latter that is often more attractive from the standpoint of investor welfare our model is a flexible one our conclusions are shown to be robust to many extensions of interest the results are also extended to consider unrestricted fee structures and competitive markets for fund managers

market for information experimental evidence predictions of the noisy rational expectations equilibrium ree model are found to be relatively accurate for both asset and information markets in the laboratory when information about an asset s uncertain dividend is sold to a fixed number of highest bidders prices allocations efficiency and distribution of profit predictions of the full revelation ree model in the asset market dominate the predictions of the walrasian model demand for information shifts to the left and its price declines close to zero when the price of information is fixed at a relatively high level the number of informed agents and the informativeness of the asset market tends to adjust to permit the informed agents to recover their investment in information

riding the bubble with convex incentives we oer a simple portfolio choice based rationale for the documented failure of institutional investors to trade against mispriced securities in a dynamic model where informed and risk averse money managers face convex i e option like incentives we show that the standard mean variance component and hedging demand that make up their portfolio often imply opposite stances against mispricing the rst component represents managers bets against overpriced securities by contrast managers hedge against the risk of forfeiting an end of period bonus payment can over weigh overpriced securities even with respect to the market portfolio this bubble riding component is more likely to drive the managers portfolio as overpricing increases although we do not model the informed managers price impact our analysis suggests that the incentives of sophisticated investors might drive them to exacerbate security mispricing

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

the inflow effect trader inflow and price efficiency abstract we investigate the impact of cash and trader inflow on price efficiency in multi period experimental asset markets implementing eight treatments with 672 subjects we find that i the joint inflow of cash and traders triggers strong overvaluation and massive price run ups inflow effect remarkably the effect occurs in almost all of the 30 markets with joint cash and trader inflow and is very robust the effect even prevails in markets with complete and symmetric fundamental information we further show that ii in treatments with the joint inflow of cash and traders prices crash to fundamentals towards maturity of the asset the analysis of traders beliefs reveals that iii despite fundamental values staying constant beliefs about fundamentals co move with upwardly trending prices finally we report a speculative motive only among the optimists in treatments where we observe the inflow effect

the formation of price forecasts in experimental markets this study utilizes laboratory experimental methods to evaluate the empirical validity of 1 muthian rational expectations assumptions 2 an adaptive expectations model and 3 an extrapolative expectations model over 5 00 price forecasts from 146 participants in twelve experimental double auction m arkets with a cash reward structure are analyzed the forecasting objective is t hemean price over a sequence of trading periods governed by stationary market parameters the price forecasts are found to be inconsistent with strict muthian rational expectations and the extrapolative modelis not supported by the data however the forecasts generally support the adaptive expectations model copyright 1987 by ohio state university press

impacts of federal crop insurance on land use and environmental quality this article integrates economic and biophysical models to assess how federal crop revenue insurance programs affect land use cropping systems and environmental quality in the u s corn belt region the empirical framework includes econometric models that predict land conversion and crop choices at the parcel level based on expectation and variance of crop revenues land quality climate conditions and physical characteristics at each site the predictions are then combined with site specific environmental production functions to determine the effect of revenue insurance on nitrate runoff and leaching soil water and wind erosion and carbon sequestration results suggest that federal crop insurance has on average a small effect on conversions of non cropland to cropland and somewhat more significant impacts on crop choice and crop rotation these changes in cropping systems have on average small impacts on agricultural pollution

tournament incentives and asset price bubbles evidence from a field experiment abstract in this note we show at the example of an experimental stock market conducted on the occasion of the world soccer championship 2010 in south africa how tournament incentives might contribute to the formation of asset price bubbles

crop insurance acreage decisions and nonpoint source pollution the redirection of farm policy in the 1996 farm bill has generated much interest in seeking environmentally friendly and economically viable ways to protect farm income agricultural insurance has been suggested as such an instrument this article estimates the effect of crop insurance on crop mix and the resulting change in chemical use in the central nebraska basin providing corn insurance will shift land from hay and pasture to corn which will increase chemical use at the extensive margin this extensive margin effect dominates the effect of crop insurance on the application rate leading to an increase in total chemical use

performance fee contract change and mutual fund risk abstract we examine the effect that an exogenously specifically governmentally required change in compensation contract had on a managerial decision we find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts in addition the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders

supply demand and technology in a multiproduct industry texas field crops the purpose of this paper is to examine the structure of agricultural production for six texas field crops cotton grain sorghum wheat corn rice and hay which account for nearly 95 of recent field crop value specific objectives are to a test the structure of technology to determine i if output and input utilization choices for individual products are independent of production decisions about other outputs and ii if products and or inputs can be consistently aggregated b estimate a coherent set of interrelated supply functions for the six commodities and input demand functions for fertilizer and hired labor because the empirical focus of this paper is specific to one state the results will be of limited value for interpreting specific production relationships elsewhere however the problem is of common interest in production agriculture and the techniques used demonstrate an important application of dual modeling

bubbles and financial professionals the efficiency of financial markets and their potential to produce bubbles are central topics in academic and professional debates yet little is known about the contribution of financial professionals to price efficiency we run 116 experimental markets with 412 professionals and 502 students we find that professional markets with bubble drivers capital inflows or high initial capital supply are susceptible to bubbles although they are more efficient than student markets in mixed markets with students bubbles also occur but professionals act as price stabilizers we show that heterogeneous price beliefs drive overpricing especially in bubble prone market environments

famous first bubbles t he jargon of economics and finance contains numerous colorful expressions to denote a market determined asset price at odds with any reasonable economic explanation such words as tulip mania bubble chain letter ponzi scheme panic crash and financial crisis immediately evoke images of frenzied and probably irrational speculative activity many of these terms have emerged from specific speculative episodes which have been sufficiently frequent and important that they underpin a strong current belief among economists that key capital markets sometimes generate irrational and inefficient pricing and allocational outcomes before economists relegate a speculative event to the inexplicable or bubble category however we must exhaust all reasonable economic explanations while such explanations are often not easily generated due to the inherent complexity of economic phenomena the business of economists is to find clever fundamental market explanations for events and our methodology should always require that we search intensively for market fundamental explanations before clutching the bubble last resort thus among the reasonable or market fundamental explanations i would include the perception of an increased probability of large returns the perception might be triggered by genuine economic good news by a convincing new economic theory about payoffs or by a fraud launched by insiders acting strategically to trick investors it might also be triggered by uninformed market participants correctly inferring changes in the distribution of dividends by observing price movements generated by the trading of informed insiders while some of these perceptions might

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

should speculators be taxed a number of economists have supported the taxation of speculation in financial markets we examine the welfare economics of such a tax in a model of a financial market where some agents have superior information and others have a hedging motive we show that a tax on speculators may actually increase speculative profits this occurs if the speculators benefit from less informative prices offsets the cost of the tax the effect on the welfare of other agents depends on how information revelation changes risk sharing opportunities it is possible for the introduction of a tax to cause a pareto improvement copyright 2000 by university of chicago press

boundaries of the tournament pricing effect in asset markets evidence from experimental markets 1 introduction when traders in experimental asset markets are compensated according to a tournament contract a salary plus bonus scheme in which a trader s bonus is proportional to the amount by which that trader exceeds the average performance in that market we observe violation of convergence results obtained in experiments that did not use such compensation schemes this effect of tournament incentives has been documented by james and isaac 2000 in this paper we search for what smith and williams 1990 have termed the boundaries of falsification for the proposition that tournament contracts affect asset market prices specifically we examine the robustness of the tournament pricing effect on market prices on several fronts first we ask whether the pricing effect survives when not all traders are being compensated according to the beat the market contract second we ask whether the tournament pricing effect is robust with respect to perturbations in the trader s compensation contract third we ask whether the pricing effect is observed in two period asset life markets hereafter 2 p a l markets as it is in 15 period asset life markets hereafter 15 p a l markets 1 section 2 presents the background of the current experiments the research conjectures and the experimental design the experimental results are contained in section 3 section 4 discusses a phenomenon that we had not encountered until these experiments section 5 offers the conclusions and thoughts for further reflection 2 conjectures and experimental design background james and isaac 2000 was the first paper to assess the effect on asset market prices of tournament contracts imposed at the individual level this is distinct from an earlier paper by brown harlow and starks 1996 that examines how individual portfolio managers allocation decisions change in response to such contracts but that does not address the issue of any effects on prices of the assets the portfolio managers are trading brown harlow and starks is itself a specific application of a wider literature on using tournament contracts to address principal agent conflicts see also nalebuff and stiglitz 1983 bull schotter and weigelt 1987 and ehrenburg and bognanno 1990 the issue of the effect on market prices is arguably the most important one surrounding the imposition of tournament contracts on portfolio managers because it is these capital market prices that help allocate savings to different forms of investment naturally misleading capital market prices can potentially lead to catastrophically misdirected capital spending 2 this key aspect of james and isaac that it addresses the effect at the market level of using tournament incentives at the individual level is also present in this paper the research objective of this paper is to document the eventual market level ramifications of varying the use of tournament contracts the nature of those variations will be discussed here the effect of tournament incentives on asset market prices prior to this paper it has been established that the way in which traders in experimental asset markets are compensated on an individual basis can significantly change the prices that eventuate at the market level in a seminal paper on experimental asset markets smith suchanek and williams 1988 hereafter ssw find that as groups of traders were called back for repeat sessions of a 15 p a l market which can be viewed as an experimental implementation of the theoretical market analyzed by tirole 1982 the market price of the asset bubbled less in each successive 15 period asset market this suggests that the no trading common expectations equilibrium derived by tirole might be reached eventually but requires experience on the part of the pool of traders of note in ssw the traders are compensated such that an experimental dollar corresponds to a u s dollar that is the traders respective experimental dollar holdings deriving variously from cash endowments dividend payments and capital gains are translated one for one into u

irrationality and beliefs in a laboratory asset market is it me or is it you abstract this paper reports on an experiment designed to examine individual and market outcomes with a mixture of rational and non rational traders using values elicited via auctions we measure a specific form of irrationality the tendency to overweight high payoff low probability events or probability judgment error subjects are classified by their tendency to exhibit errors as well as their beliefs regarding whether others will make errors subjects then participate in a series of double auction markets the results indicate that both probability judgment error and beliefs about other subjects susceptibility to probability judgment error have significant impact on individual and market outcomes

transaction taxes and the behavior of the swedish stock market abstract this paper studies the effects of transaction taxes on the behavior of swedish equity returns during the 1980 1987 period sweden provides an excellent laboratory style setting for such a study as taxes were imposed for political purposes rather than to alter the behavior of the stock market volatility did not decline in response to the introduction of taxes although stock price levels and turnover did large proportions of trading activity migrated overseas to london when the tax rate was increased to 2 in 1986

on relative performance contracts and fund manager s incentives abstract for pension schemes mutual funds banks and other financial intermediaries large portfolio decisions are increasingly delegated to fund managers recently there has been growing concern that these managers seem to adopt extremely similar investment strategies one possible explanation for this phenomenon may be found in reward schemes based on relative performance we show how relative performance reward schemes may arise as optimal contracts our focus is the fund owners fund manager relationship in which the manager before making a portfolio decision on behalf of the owners may acquire at some cost information that is not available to the owners payment schemes based on relative performance afford the owners tighter control of their manager s activities however if two managers of different funds both accept contracts that depend on their relative as well as absolute performances then there may exist equilibria in the managers subgame that result in undesirable outcomes for the owners

tournament behavior in hedge funds high water marks fund liquidation and managerial stake we analyze whether risk shifting by a hedge fund manager is related to the manager s incentive contract personal capital stake and the risk of fund closure we find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund s high water mark and when funds face little immediate risk of liquidation risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund overall high water mark provisions managerial stake and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting

the effect of short selling and borrowing on market prices and traders behavior this paper studies the influence of allowing borrowing and short selling on market prices and traders forecasts in an experimental asset market we verify although not statistically significantly so that borrowing tends to increase asset overvaluation and price orecasts while short selling tends to reduce these measures we also show that a number of results on beliefs traders types cognitive sophistication and earnings obtained in earlier experimental studies in which borrowing and short selling are not possible generalize to markets with borrowing and short sales

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

an empirical analysis of acreage effects of participation in the federal crop insurance program the extent to which crop insurance programs have resulted in additional land being brought into production has been a topic of considerable debate we consider multiequation structural models of acreage response insurance participation crp enrollment and input usage our analysis focuses on corn and soybean production in the corn belt and wheat and barley production in the upper great plains our results confirm that increased participation in insurance programs provokes statistically significant acreage responses in some cases though the response is very modest in every case in the most extreme cases 30 decreases in premiums as a result of increased subsidies provoke acreage increases ranging from 0 2 to 1 1 a number of policy simulations involving increases in premium subsidies are considered

adverse risk incentives and the design of performance bases contracts this paper uses option pricing theory to value and analyze many performance based fee contracts that are currently in use a potential problem with some of these contracts is that they may induce portfolio managers to adversely alter the risk of the portfolios they manage the paper is prescriptive in that it presents conditions for contract parameters that provide proper risk incentives for classes of investment strategies for buy and hold and rebalancing strategies adverse risk incentives are avoided when the penalties for poor performance outweigh the rewards for good performance

from microlevel decisions to landscape changes an assessment of agricultural conservation policies the growth in conservation programs has created a need for modeling frameworks capable of measuring microlevel behavioral responses and macrolevel landscape changes this paper presents an empirical model that predicts farmers production practices and the resulting levels of agricultural runoffs at more than 42 000 agricultural sites in the upper mississippi river basin under alternative conservation policies results suggest that payments for conservation tillage and crop rotations increase the use of these conservation practices however the acreage response is inelastic and the programs are not likely to be cost effective on their own for addressing hypoxia problem in the gulf of mexico

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

sufficient conditions for inessentiality three theorems state conditions sufficient for the inessentiality of equilibrium in a pure exchange sequence economy the agents have uncommon priors state contingent utility functions and asymmetric information in every trading period and they trade different sets of event contingent claims in different periods the theorems provide alternative interpretations of the concept of market completeness reveal two fundamentally different ways to obtain inessentiality and shed light on the conditions permitting speculation and the role of price contingent trading none of the theorems requires ex ante pareto optimality or the absence of arbitrage opportunities copyright 1993 by the econometric society

potential environmental impacts of increased reliance on corn based bioenergy this paper integrates economic and physical models to assess a how increases in agricultural commodity prices driven by ethanol production and other factors affect land use and cropping systems in the us midwest and b how the changes in land use and cropping systems in turn affect environmental quality in the region the empirical framework includes a set of econometric models that predict land conversion crop choices and crop rotations at the parcel level based on commodity prices land quality climate conditions and other physical characteristics at the sites the predictions are then combined with site specific environmental production functions to determine the effect of rising commodity prices on nitrate runoff and leaching soil water and wind erosion and carbon sequestration results suggest that increasing commodity prices will result in widespread conversions of non cropland to cropland fifty percent of the region s pasture and range land will be converted to cropland with 6 corn rising commodity prices will also result in dramatic changes in crop mix and rotation systems in the midwest with 6 corn the total acreage of corn will increase by 23 and 40 in the corn belt and lake states respectively the acreage of continuous corn will increase considerably in both regions as well these changes in land use and crop mix will have a large impact on agricultural pollution approaches to mitigating the environmental impacts are discussed

higher order risk attitudes a review of experimental evidence abstract this paper reviews the recent but fast growing experimental literature on higher order risk attitudes after introducing the theoretical context we first review the basic evidence and empirical moderators of these risk attitudes we then discuss recent extensions to ambiguity time risk and multi attribute utility in the last part we review indirect evidence from applied economic decision tasks

margin short selling and lotteries in experimental asset markets the robustness of bubbles and crashes in markets for assets with finite lives is perplexing this paper reports the results of experimental asset markets in which participants trade two assets in some markets price bubbles form in these markets traders pay higher prices for the asset with lottery characteristics i e a claim on a large unlikely payoff however institutional design has a significant impact on deviations in prices from fundamental values particularly for an asset with lottery characteristics price run ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell

the bull of wall street experimental analysis of testosterone and asset trading growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets testosterone a chemical messenger especially influential in male

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract we investigate the impact of investment managers tournament incentives on investment strategies and market efficiency distinguishing between winner take all tournaments wta where a minority wins and elimination contests ec where a majority wins theoretically we show that investment managers play heterogeneous strategies in wta and homogeneous strategies in ec and markets are more prone to mispricing in wta than in ec experimentally we find that investment managers play more heterogeneous strategies in wta than in ec but this does not trigger significant differences in prices moreover prices in wta and ec do not differ significantly from markets composed of linearly incentivized subjects

momentum and overreaction in experimental asset markets abstract price volatility and investor overreactions are commonplace in experimental asset markets understanding the price dynamics in these markets is crucial for designing successful new trading institutions we report on a series of experiments to test the predictions of a new momentum model using a dynamical systems approach this model is then pitted against several standard models to predict prices as well as against expert human forecasters the comparative results suggest that each model has its advantages and regions of best performance overall the best predictive methods are the momentum model and expert human forecasters

individual expectations limited rationality and aggregate outcomes recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price we present an experiment where the fundamental price experiences large unexpected shocks markets with negative expectation feedback strategic substitutes quickly converge to the new fundamental while markets with positive expectation feedback strategic complements do not converge but show underreaction in the short run and overreaction in the long run a simple evolutionary selection model of individual learning explains these differences in aggregate outcomes

experimental evidence on varying uncertainty and skewness in laboratory double auction markets abstract we investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double auction markets three different types of assets are considered risky assets ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations we show that market prices for skewed assets initially differ from those of non skewed assets for risky as well as for ambiguous assets because of learning the difference in market prices mostly disappears towards the end of trading when fundamentals are learned by experience sampling prices of all assets irrespective of skewness are very efficient from the beginning thus when probabilities are not described but experienced subjects are better able to estimate the fundamental value of an asset

do option like incentives induce overvaluation evidence from experimental asset markets 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 the main results are that i we observe significantly higher market prices with option like incentives than linear incentives ii we further find that option like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives iii we finally show that trading at inflated prices is rational for subjects with option like incentives since it increases their expected payout

the state contingent properties of stochastic production functions this paper develops the state contingent properties of the most frequently used representations of stochastic production in the agricultural economics literature particular attention is paid to the cases of multiplicative and additive uncertainty and to the convolution of multiplicative and additive uncertainty embodied in the just pope stochastic production function state contingent technologies and their associated cost functions are reviewed and that theory is applied to the stochastic production function a generalisation of the just pope technology that has desirable state contingent characteristics is proposed cost functions based upon state contingent technologies are compared with cost functions based on a parametrised distribution representation of production uncertainty

thar she blows can bubbles be rekindled with experienced subjects we report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and error elimination among participants in a laboratory asset market and its effect on price bubbles our answer to the title question is yes we impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium and this treatment rekindles a bubble however in replications of that same challenging environment across three experience levels we discover that the environment yields a rare residual tendency to bubble even in the third experience session therefore a caveat must be placed on the effect of twice experienced subjects in asset markets in order for price bubbles to be extinguished the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters experience including possible error elimination is not robust to major new environment changes in determining the characteristics of a price bubble jel c91 d83

experiments on electronic double auctions and abnormal trades the flash crash experienced by u s markets in may 2010 provided stark evidence that a large trade can have a powerful influence we explore the impact of an unusual trade on behavior in experimental bubbles markets we chose the experimental design proposed by smith suchanek and williams 1988 because replication shows it produces markets prone to mispricing after several rounds of trading our markets receive a large quantity order at an extreme price in a standard double auction bubble market pricing is unaffected by an abnormal order however with increased uncertainty about the underlying economic value of the asset over pricing weakens on arrival of a negative price shock

using an artificial financial market for assessing the impact of tobin like transaction taxes abstract the tobin tax is a solution proposed by many economists for limiting the speculation in foreign exchange and stock markets and for making these markets stabler in this paper we present a study on the effects of a transaction tax on one and on two related markets using an artificial financial market based on heterogeneous agents the microstructure of the market is composed of four kinds of traders random traders fundamentalists momentum traders and contrarians and the resources allocated to them are limited in each market it is possible to levy a transaction tax in the case of two markets each trader can choose in which market to trade and an attraction function is defined that drives their choice based on perceived profitability we performed extensive simulations and found that the tax actually increases volatility and decreases trading volumes these findings are discussed in the paper

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

a review of bubbles and crashes in experimental asset markets this paper discusses the literature on bubbles and crashes in the most commonly used experimental asset market design introduced by smith et al it documents the main findings based on the results from 41 published papers 3 book chapters and 20 working papers

incentive fees some problems and some solutions 1987 incentive fees some problems and some solutions financial analysts journal vol 43 no 1 pp 21 26

a linear model for tracking error minimization abstract this article investigates four models for minimizing the tracking error between the returns of a portfolio and a benchmark due to linear performance fees of fund managers we can argue that linear deviations give a more accurate description of the investors risk attitude than squared deviations all models have in common that absolute deviations are minimized instead of squared deviations as is the case for traditional optimization models linear programs are formulated to derive explicit solutions the models are applied to a portfolio containing six national stock market indexes usa japan uk germany france switzerland and the tracking error with respect to the msci morgan stanley capital international index world stock market index is minimized the results are compared to those of a quadratic tracking error optimization technique the portfolio weights of the optimized portfolio and its risk return properties are different across the models which implies that optimization models should be targeted to the specific investment objective finally it is shown that linear tracking error optimization is equivalent to expected utility maximization and lower partial moment minimization