Agency in financial markets has been claimed to foster excessive risk taking, ultimately leading to bubble formation. The main driving factor appears to be the skewed bonus system for agents who invest other people’s money. The resulting excessive risk taking on behalf of others would imply that such bonus systems crowds out responsible decision making for others in order to serve egoistic self-interest. To test this implication, we conduct laboratory experiments comparing decision making for others with and without such a bonus system. First, we show that, in the absence of bonus systems, decision makers invested significantly less for others than for themselves. Second, we show that limited liable decision makers—participating only in gains but not in losses—invested substantially more for others than for themselves. Hence, our results suggest that indeed limited liability outweighs responsibility.
- financial decision making
- limited liability
- decision making for others
- risk preferences
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Luhan, W. (Creator) & Fuellbrunn, S. (Creator), University of Portsmouth, 2020