A BAYESIAN GAME FOR A PROFIT AND LOSS SHARING CONTRACT

Djaffar Lessy (), Marc Diener () and Francine Diener ()
Additional contact information
Djaffar Lessy: Université Côte d’Azur, IAIN Ambon, France and Indonesia
Marc Diener: Université Côte d’Azur, France
Francine Diener: Université Côte d’Azur, France

Journal of Islamic Monetary Economics and Finance, 2021, vol. 7, issue 3, 431-456

Abstract: This paper presents a Bayesian game model for a profit-and-loss sharing (PLS) contract. We develop the model in two parts, one for a non-social bank and the other for a social bank. The model is proposed to reduce the adverse selection problem inherent in PLS contracts. The game starts with incomplete information; Islamic banks do not know exactly what type of agent is applying for a PLS contract, and whether the agents are efficient or non-efficient. We assume that the banks assign the agent type to a prior probability. Determination of the profit-sharing ratio of the contract is then discussed, and we look for the Bayesian Nash equilibrium as a solution or outcome of the game.We show that banks offer interesting but risky contracts to agents if they assign high probability to the agents being efficient. In contrast, they offer less risky contracts if they assign high probability to the agents being non-efficient. The results can be considered by Islamic banks to reduce the adverse selection problem in PLS contracts.

Keywords: Bayesian game; Profit and loss sharing; Adverse selection; Islamic finance (search for similar items in EconPapers)
JEL-codes: C02 C7 D82 E51 G21 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
http://jimf-bi.org/index.php/JIMF/article/view/1367/867 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:7:y:2021:i:3a:p:431-456

DOI: 10.21098/jimf.v7i3.1367

Access Statistics for this article

Journal of Islamic Monetary Economics and Finance is currently edited by Dr. Ali Sakti

More articles in Journal of Islamic Monetary Economics and Finance from Bank Indonesia Contact information at EDIRC.
Bibliographic data for series maintained by Lutzardo Tobing ( this e-mail address is bad, please contact ) and Jimmy Kathon ().