A multiagent game theoretical approach to adverse selection in corporate financing

Elfakir, Adil; Tkiouat, Mohamed

doi:10.21511/imfi.13(2-2).2016.04

Investment Management and Financial Innovations

2016

DOI: 10.21511/imfi.13(2-2).2016.04

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A multiagent game theoretical approach to adverse selection in corporate financing

Adil Elfakir¹,

Mohamed Tkiouat²

Abstract: 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… Show more

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Cited by 4 publications

References 12 publications

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A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool

Fakir

Fairchild

Tkiouat

2019

The North American Journal of Economics and Finance

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In this paper two models are contrasted whereby a corporation is seeking to finance the purchase of a merchandise from a supplier through a profit and loss sharing contract.The first mode consist of financing the purchase totally through equity. The second model is a new hybrid model that engages the supplier in the process as a shareholder.Both models are based on the principle of profit and loss sharing which suffers from the issue of moral hazard.This is manifestedin the form of the corporation shirking (providing low effort) and/or misreporting profits. It is argued that under equity financing, where the financier is the only shareholder, the corporation can hide part of the merchandise it sold and therefore misreport profits. This is, however, not possible under hybrid financing where, in addition to the financier, the supplier is interested in the financial reporting of the corporation. We apply a game theoretical approach where ,under a hybrid financing, the financier and the supplier have mutual interest in true revenue reporting and therefore constitute a coalition (one player) against the corporation. Our game incorporates the effect of sharing markets and corporations' discounts between the game participants under each model. We showtheoretically that a non-conditional good Nash equilibrium exists under hybrid financing. This case does not apply to an all equity financing where the existence of a good Nash equilibrium is conditional upon the financier and the supplier sharing ratios. This shows that under the hybrid model the corporation is always induced to provide more effort (not shirk) and truly report profits.

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A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool

Fakir

Fairchild

Tkiouat

2019

The North American Journal of Economics and Finance

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Game theory model for the development of optimal strategy towards innovative products manufacturing at the enterprise

Yurynets

Kis

Gutor

2017

Problems and Perspectives in Management

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The carried out research confirms the expediency of economic mathematical modeling (game theory) implementation in practice of economical activity. The paper presents a designed game theory model of optimal innovative strategy for product manufacturing at the enterprise considering the expenses due to the production, storage and transportation of basic goods; extra expenses for the development of innovative products and supplementary costs granted by the company for the innovative products development in order to decrease possible material losses by the defined reasons. The developed game theory model aims to develop the optimal strategy for innovative products manufacturing was implemented and approved at the enterprise, which produces different means of operative communication. The assigned solution of a task included the calculation of the company’s optimal innovative product release with the aim of receiving a maximum income from the developed products realization. The model enables to define the percentage ratio of the efficient manufacturing of innovative products at the enterprise, considering the state of the market and competitive behavior in overall product assortment, the possibility of this ratio optimal correction in order to maximize the income from innovative products realization. Performed calculations allow the company’s managers to determine the beneficial and non-beneficial market state for certain types of innovative products and to improve the decision making process concerning the increase or the reduction of innovative products manufacturing.

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PLS ratios negotiability: A repeated game incentive mechanism approach

Fakir¹,

Tkiouat²

2018

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PLS contracts in Islamic finance are fair economic practices as they focus on sharing profits and loss between the project’s participants. Despite its ethical dimension, moral hazards and adverse selection are the paramount risks in this type of contracts. In this paper we seek reducing moral hazards in the form of the entrepreneur’s effort shirking and if a project optimum lifetime can be identified. To answer these questions, we use a game theory approach in one stage and in a repeated framework. Under each scenario, the participants either fix the capital contributions or negotiate over the sharing ratio or vice-versa. We found theoretical evidence that cooperation can be sustained over a one period game. Cooperation can be sustained in a repeated game only if an appropriate monetary incentive is introduced. However, this incentive can only be given for a specific period before the project’s NPV starts to drop. Indeed, we managed to find that period, called duration, for which the financier NPV is maximized. This duration can be proposed to be used as the optimum lifetime of the contract.

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A multiagent game theoretical approach to adverse selection in corporate financing

Cited by 4 publications

References 12 publications

A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool

A hybrid profit and loss sharing model using interest free-debt and equity financing: An application of game theory as a decision tool

Game theory model for the development of optimal strategy towards innovative products manufacturing at the enterprise

PLS ratios negotiability: A repeated game incentive mechanism approach

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