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

Adil EL Fakir and Mohamed Tkiouat
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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

International Journal of Economics and Financial Issues, 2016, vol. 6, issue 1, 221-230

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.

Keywords: Mudaraba; Self-Selection Mechanism; Adverse Selection Index; Frequency of Due Diligence; Islamic Venture Capitalist; Incomplete Information (search for similar items in EconPapers)
JEL-codes: C7 G02 G17 G24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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