Investment Under Profit‐Sharing Contracts: The Adverse Selection Case
Abdel‐Hameed M. Bashir
(Department of Economics, Grambling State University, Grambling, LA 71245)
223
Abstract
In this paper we analyze investment behavior under profit‐and‐ loss sharing contracts in an environment of asymmetric information. Under certain restrictive assumptions, PLS contracts are characterized with over investment, where the equilibrium level of investment exceeds the first best (full information) level. A zakat tax on profit is shown to restore efficiency.
Citation
Bashir, A.M. (1996), "Investment Under Profit‐Sharing Contracts: The Adverse Selection Case", Managerial Finance, Vol. 22 No. 5, pp. 48-58. https://doi.org/10.1108/eb018563
Publisher
:MCB UP Ltd
Copyright © 1996, MCB UP Limited