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Single or Menu Contracting: A Game Theory Application of the Hersanyi Model to Mudaraba Financing

Author

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  • Adil EL Fakir

    (IFE-Lab, Laboratory of Research in Applied Mathematics, Ecole Mohamadia d'Ingenieurs, Mohamed V University, Morocco,)

  • Mohamed Tkiouat

    (IFE-Lab, Laboratory of Research in Applied Mathematics, Ecole Mohamadia d'Ingenieurs, Mohamed V University, Morocco)

Abstract

In Islamic banking, the offering of a Mudaraba contract to a privately informed agent results in adverse selection. In incentive theory, a hypothesis is that the seller, in our case the Islamic bank, may offer different menu of contracts to separate non-efficient agents from the efficient ones. To test this hypothesis, we apply a game theory approach using an incomplete information model combined with an adverse selection index. From a rational point of view a bank would like to offer a higher type contract to an efficient agent to get higher rewards. Under an asymmetric case, however, we found evidence that in some cases offering a lower type contract can result in higher social value. Menu offering is found not to be the ultimate solution for agent's types' separation.

Suggested Citation

  • Adil EL Fakir & Mohamed Tkiouat, 2016. "Single or Menu Contracting: A Game Theory Application of the Hersanyi Model to Mudaraba Financing," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 221-230.
    • Handle: RePEc:eco:journ1:2016-01-30
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    References listed on IDEAS

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    Cited by:

    1. EL Fakir, Adil & Fairchild, Richard & Tkiouat, Mohamed, 2019. "A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 352-360.
    2. Adil Elfakir & Mohamed Tkiouat, 2019. "Adverse Selection and Moral Hazards Reduction in Corporate Financing: A Mechanism Design Model for PLS Contracts," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 163-179, May.

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    More about this item

    Keywords

    Mudaraba; Self-Selection Mechanism; Adverse Selection Index; Frequency of Due Diligence; Islamic Venture Capitalist; Incomplete Information;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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