A multiagent game theoretical approach to adverse selection in corporate financing

  • Released On
    Thursday, 14 July 2016
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  • DOI
    http://dx.doi.org/10.21511/imfi.13(2-2).2016.04
  • Article Info
    Volume 13 2016, Issue #2 (cont. 2) , pp. 292-299
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In this research the authors tried to solve the adverse selection problem in the Mudaraba contracts with respect to the projects privately known prospects. The authors introduced a model of two contracts characterized by an adverse selection index for each contract. They have managed to find that a case of market breakdown can occur because the efficient agent might mimic the inefficient agent. The authors, then, managed to develop a ‘Mimicking Likelihood Index’ whereby one can infer whether a type of an agent has a tendency to mimic the other type. In the same context, the authors developed a “Relative Adverse Selection” index to measure which type of agents has more tendencies to select a specific type of contracts. These findings should help Islamic financial institutions in their agent selection process and hedge its risky Mudaraba contracts

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