Research Article Open Access

New Projects Sharing Ratios under Musharakah Financing: A Repeated Game Theoretical Approach Using an Output versus a Proposed Effort Based Contract

Adil Elfakir1 and Mohamed Tkiouat1
  • 1 Mohammed V University, Morocco

Abstract

In this research, we provide a game theoretical approach of new projects financed under musharakah contracts using two types of contracts. The first type is effort based. It compensates the agent for the effort provided regardless of market conditions. The other type of contract is output based where the agent compensation is based solely on output realized. Our intuition is, on one hand, that an agent acceptance of an effort based contract signals a higher ability and therefore merits a higher compensation. On the other hand, an agent opting for an output based signals a reliance on market condition and therefore a lower effort ability meriting lower compensation. We found evidence that an effort based contract offer better compensation to the agent in the form of lower sharing ratio to the financier. This result has two important Islamic implications. First it emphasizes the sentiment of altruism which the financier shows by taking a smaller sharing ratio. Second it emphasizes the sentiment of positive reciprocity which the agent exhibits by providing high effort. Another finding is that an effort based contract offers more span of negotiation than an output based contract. This is an important Islamic concept as the agent has fewer restrictions in terms of negotiations. This paper tackle two problems of information assymetries. Namely it tackles adverse selection and moral hazards.

American Journal of Applied Sciences
Volume 12 No. 9, 2015, 654-662

DOI: https://doi.org/10.3844/ajassp.2015.654.662

Submitted On: 20 August 2015 Published On: 8 October 2015

How to Cite: Elfakir, A. & Tkiouat, M. (2015). New Projects Sharing Ratios under Musharakah Financing: A Repeated Game Theoretical Approach Using an Output versus a Proposed Effort Based Contract. American Journal of Applied Sciences, 12(9), 654-662. https://doi.org/10.3844/ajassp.2015.654.662

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Keywords

  • Musharakah
  • Effort Based Contracts
  • Output Based Contracts
  • Sharing Ratio
  • Moral Hazard
  • Adverse Selection