An Agent-Based Model to Study the Impact of Convex Incentives on Financial Markets

We investigate by means of agent-based simulations the influence of convex incentives, e.g. option-like compensation, on financial markets. We propose an agent based model already developed in Fabretti et al (2015), where the model was build with the aim of studying convex contract effect using the results of a laboratory experiment performed by Holmen et al. (2014) as benchmark. Here we replicate their results studying prices dynamics, volatility, volumes and risk preference effect. We show that convex incentives produces higher prices, lower liquidity and higher volatility when agents are risk averse, while, differently from Fabretti et al (2015), their effect is less evident if agents are risk lovers. This appears related to the fact that prices in the long run converge more likely to the equilibrium when agents are risk averse.