Principal-agent preferences in imperfect markets: theoretical analysis on Murabahah and Ijarah
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 w...
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| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Bank Indonesia Institute
2019
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/77575/1/77575_Principal-agent%20preferences%20in%20imperfect%20markets.pdf http://irep.iium.edu.my/77575/ https://jimf-bi.org/index.php/JIMF/article/view/1050/749 https://doi.org/10.21098/jimf.v5i1.1050 |
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| Summary: | 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. |
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