A Theory of Profit Sharing Ratio With Adverse Selection : The Case of Islamic Venture Capital
Jouaber, Kaouther; Mehri, Meryem (2011-09), A Theory of Profit Sharing Ratio With Adverse Selection : The Case of Islamic Venture Capital, European Research Group "Money, Banking & Finance" (Islamic Finance Group) Workshop : " International Sustainable Finance ", 2011-09, Paris, France
TypeCommunication / Conférence
Conference titleEuropean Research Group "Money, Banking & Finance" (Islamic Finance Group) Workshop : " International Sustainable Finance "
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Abstract (EN)This paper presents a theory for Islamic venture capital namely ‘Mudharabah’ contract under adverse selection problem. In order to avoid selecting a low type entrepreneur for a given good project, the framework defines the profit sharing ratio (PSR) as a screening device. We then develop a Profit Sharing Ratio model for Islamic venture capital under adverse selection. We find the optimal PSR as function of the respective risk aversion degree of both the entrepreneur and the IVC (Islamic venture capitalist). Their risk aversion degrees influence their decisions to fix the PSR during the negotiation stage. We show that the high type entrepreneur will tolerate to the IVC a PSR higher than the PSR accepted by the low type. In the negotiation stage, whatever the entrepreneur type, the higher the management fee and the higher the PSR tolerated to the IVC.
Subjects / KeywordsIslamic Venture Capital; Mudharabah; Profit Sharing Ratio; Adverse Selection; Risk Aversion degree
JELD82 - Asymmetric and Private Information; Mechanism Design
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
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