Can real options reduce moral hazards in profit and loss sharing contracts ? : a behavioural approach using game theory and agent based simulation
Joint Authors
al-Faqir, Adil
Tkiouat, Muhammad
Fairchild, Richard
Pakgohar, Ali Rida
Source
Journal of Islamic Business and Management
Issue
Vol. 10, Issue 2 (31 Dec. 2020), pp.284-302, 19 p.
Publisher
Riphah International University Riphah Centre of Islamic Business
Publication Date
2020-12-31
Country of Publication
Pakistan
No. of Pages
19
Main Subjects
Abstract EN
In this paper, we try reducing the moral hazard of profit misreporting in Profit and Loss Sharing Contract (PLS).
In this kind of contracts , the corporate manager has a temptation to misreport profits which can lead to either project failing or to financiers receiving an unfair allocation of profits.
To help in solving this problem we propose a new model that includes a real option that gives the corporate manager (agent) the right, but not the obligation, to gradually buy shares in the corporation from the financier/bank.
We compare our results with the standard case of PLS without real options.
We show, using a multi-agent simulation (Netlogo) that embedding real options in the PLS contract can reduce the profit misreporting case.
The fact that PLS contracts are riskier compared to other forms of financing such as debt, provides an incentive for the creation of models that reduce their risk to capital providers.
Given the results obtained from our real options model, the latter could prove to be of practical use to financial institutions willing to engage in PLS financing.
American Psychological Association (APA)
al-Faqir, Adil& Tkiouat, Muhammad& Fairchild, Richard& Pakgohar, Ali Rida. 2020. Can real options reduce moral hazards in profit and loss sharing contracts ? : a behavioural approach using game theory and agent based simulation. Journal of Islamic Business and Management،Vol. 10, no. 2, pp.284-302.
https://search.emarefa.net/detail/BIM-1429382
Modern Language Association (MLA)
al-Faqir, Adil…[et al.]. Can real options reduce moral hazards in profit and loss sharing contracts ? : a behavioural approach using game theory and agent based simulation. Journal of Islamic Business and Management Vol. 10, no. 2 (2020), pp.284-302.
https://search.emarefa.net/detail/BIM-1429382
American Medical Association (AMA)
al-Faqir, Adil& Tkiouat, Muhammad& Fairchild, Richard& Pakgohar, Ali Rida. Can real options reduce moral hazards in profit and loss sharing contracts ? : a behavioural approach using game theory and agent based simulation. Journal of Islamic Business and Management. 2020. Vol. 10, no. 2, pp.284-302.
https://search.emarefa.net/detail/BIM-1429382
Data Type
Journal Articles
Language
English
Notes
Includes appendix : p. 300-302
Record ID
BIM-1429382