IIUM Repository

Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah

Ajmi, Hechem and Abd. Aziz, Hassanuddeen and Kassim, Salina and Mansour, Walid (2019) Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah. Journal of Islamic Monetary Economics and Finance, 5 (1). pp. 117-144. ISSN 2460-6146 E-ISSN 2460-6618

[img]
Preview
PDF - Published Version
Download (5MB) | Preview

Abstract

This paper aims to determine the optimal contract for the principal and the agent in imperfect markets, when murabahah and ijarah are used. The financial contracting enforceability approach is employed to determine the contract that maximizes the value of the firm subject to agents’ constraints when the shock is low and high, and regarding market frictions. Furthermore, this approach allows us to assess the level of market frictions that agents may bear in case of low shock and high shocks. Findings reveal that the simulated values of the market frictions’ parameters for both contracts increase when moving from the low shock to the high shock. Such evidence implies that the agent is more likely to cheat and hide significant information about the project when the shock is high. As a response to this higher risk, the simulated values of the profit margin parameters for the principal rise also when the shock is high in order to compensate for the increase of market frictions and mitigate conflicts of interest. By comparing both contracts based on the simulated optimal values of the firm, it is noticeable that the gap between both contracts is very tight, which can be attributed to their common debt-based financial arrangements. However, the results show that ijarah allows the principal and the agent to generate the highest value in case of low shock and high shock, comparing to murabahah. Therefore, ijarah seems to be more attractive for the principal and the agent than murabahah.

Item Type: Article (Journal)
Additional Information: 270/77575
Uncontrolled Keywords: Murabahah, Ijarah, Conflict of Interest, Monte-Carlo Simulation, Market Frictions, Optimal Contract.
Subjects: H Social Sciences > HG Finance > HG3368 Islamic Banking and Finance
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button): Kulliyyah of Economics and Management Sciences > Department of Finance
Institute of Islamic Banking & Finance (IIiBF)
Kulliyyah of Economics and Management Sciences
Depositing User: NOOR HILDAWATI ABDUL HAMID
Date Deposited: 27 Dec 2019 16:21
Last Modified: 08 Apr 2020 13:37
URI: http://irep.iium.edu.my/id/eprint/77575

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year