A BAYESIAN GAME FOR A PROFIT AND LOSS SHARING CONTRACT
This paper presents a Bayesian Game model for a profit-and-loss sharing (PLS) contract. We develop our model into two parts, namely the model for non-social bank and the model for social bank. We propose the model to reduce adverse selection problem in offering a PLS contract. The Bayesian game starts with an incomplete information. Islamic banks do not know exactly what type of agent is applying for a PLS contract, efficient or non-efficient, the information of the bank is incomplete. In Bayesian game, we assume that the Islamic Bank assigns the agent type with a prior probability. Determination of the profit-sharing ratio of the contract will be discussed. We look for the Bayesian Nash equilibrium of the game in our model which is considered a solution. We show that the bank offers an interesting but risky contract to the agent if the bank assigns that the agent is efficient with a high probability, otherwise the bank offers a less risky contract to the agent if the bank assigns that the agent is a non-efficient agent with high probability. The results can be considered by Islamic banks to reduce the adverse selection problem in PLS contract.
Ajmi, H., Aziz H. A., Kassim S., & Mansour W. (2019). Adverse Selection Analysis for Profit and Loss Sharing Contracts. International Journal of Islamic and Middle Eastern Finance and Management, September, 532-552.
Akerlof, G. A. (1970). The Market for “Lemons” : Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84, 488-500.
Benedikter, R. (1991). European Answers to the Financial Crisis : Social Banking and Social Finance. Spice Stanford: Spring.
Bien, F, Lanzi, T., & Mathis, J. (2019). Théories des jeux et des contracts. Montreuil: Pearson.
Causse-Broquet. (2009). La finance islamique. Paris: Revue Banque ed.
Fakir, A. E., & Tkiouat, M. (2016). Single or menu contracting: a game theory application of the Hersanyi model to mudaraba financing. International Journal of Economics and Financial Issues, 6(1), 221-230.
Fudenberg, D., & Tirole, J. (1991). Game Theory. London: The MIT Press.
Gait, A. H., & Worthington, A. C., (2009). A Primer on Islamic Finance : Definitions, Sources, Principles and Methods (Working Paper 09). Griffith Business School.
Harsanyi, J. C. (1967). Games with Incomplete Information Played by “Bayesian” Players, I-III. Management Science, 14(3), 159-182.
Hayes, Adam. Adverse Selection. Retrieved 1 September 2020 from https://www.investopedia.com/terms/a/adverseselection.asp.
Jouaber, K., & Mehri M. (2017). A theory of profit-sharing ratio under adverse selection: the case of Islamic venture capital (Working Paper). HAL archives-ouvertes.
Kamarudin, W. N. W., & Ismail, A. G. (2013). Profit sharing and loss bearing in financial intermediation theory. Journal of Investment Management and Financial Innovations, 10(2), 184-192.
Koçkesen, L., & Ok, E. A. (2007). An Introduction to Game Theory. Course au Koç Üniversite, Retrieved 5 Septembre 2020 from https://www.ku.tr.
Lessy, D., Koudjeti, F., Diener M., & Diener F. (2019). A Markov Chain Model for Islamic Micro-financing. Journal of Islamic Monetary Economics and Finance, 5(4), 763-784.
Munoz-Garcia, F. Course au Washington State University. Retrieved 15 Septembre 2020, from https ://felixmunozgarcia.com/econs-424.
Osborne, M. J., & Rubinstein. (1994). A Course in Game Theory. London: The MIT Press.
Ouidad, Y. (2013). Does PLS financing solve asymmetric information problems? Journal of Islamic Economics, Banking and Finance, 9(3), 13.
Peters, H. (2015). Game Theory. New York: Springer.
Sapuan, N., M. (2016). An Evoluation of Mudarabah Contract: A Viewpoint from Classical and Contemporary Islamics Scholars. Procedia Economics and Finance, 35, 349-358.
Shaikh, S.A. (2011). A critical analysis of Mudarabah & A new approach to equity financing in Islamic finance. Journal of Islamic Banking & Finance, 28(3).
Shapiro, D. A. (2015). Microfinance and dynamic incentives. Journal of Development Economics, 115, 73-84.
Stiglitz, J. E., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Review, 73, 393-410.
Tag El-Din, S. I. (2008). Income Ratio, Risk-Sharing, and the Optimality of Mudarabah. Journal of King Abdulazis University: Islamic Economics, 21(2), 37-59.
Weber, O. (2014). Socail Banking : Concept, Definitions and Practice. Global Social Policy, 14(2), 265-281.
Yousfi, O. (2013). Does PLS financing solve asymmetric information problems? (Working Paper). HAL archives-ouvertes.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.