Unveiling the puzzle of Islamic economics and finance, behavioral economics and experimental studies: an exploration from a gift-exchange game experiment

Azizon

Chapter 11 in Islamic Finance and the Pursuit of Sustainable Prosperity, 2025, pp 232-254 from Edward Elgar Publishing

Abstract: Adopting experimental approaches supported by behavioral economics in Islamic economics and finance (IEF) offers valuable insights into the dynamics of cooperative behavior, which is crucial for sustaining contractual relationships in Islamic finance. This study employs a finitely repeated principal-agent game with an anonymous partner-matching protocol to explore how experimental methods can shed light on key aspects of Islamic finance contracts, such as Profit Loss Sharing (PLS) agreements, including mudarabah and musharakah. By integrating accumulative target setting and monetary incentives, the experiment demonstrates how these tools can promote cooperation between capital owners and labor. The findings suggest that target-setting mechanisms enhance cooperative behavior, offering practical insights for the implementation of Islamic finance. The simulated experimental study indicates that an experimental approach can be a valuable alternative for exploring IEF and suggests that IEF should leverage experimental methods and behavioral economics to advance both academically and practically.

Keywords: Behavioral economics; Experimental economics; Principal-agent game; Islamic finance; Science; Practical; Development (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035349678
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