Incentive-Compatible Contracts and the “Efficiency Cost” of Sharīʿah-Compliance العقود المتوافقة مع الحوافز و "تكلفة الكفاءة" للشريعة-الامتثال

Much of neoclassical economics, and especially general equilibrium theory, neglects the complications of asymmetric information, the enforceability of contracts, and, a fortiori, finance. In this idealized world, agents have preferences over consumption today and in the future, endowments, and a palate of investment opportunities. The discount rate is based on a psychological fact or assumption that people prefer consumption sooner rather than later. There is no fixed nominal interest rate as such, just as there is no inflation. The picture is not fundamentally altered by the introduction of Arrow-Debreu securities or endogenous growth. As pointed out in Zarqa (2017), interest rates arise as a feature of contracts, as do other financial relationships, including Islamic, Sharīʿah-compliant relationships. Contracts are used as one means to handle principal-agent problems under imperfect control and verification, and asymmetric information. Finance, at the most abstract level, is about transferring claims across time and states of the world, where you cannot fully trust your counterpart or do everything yourself. So whether the form of a financial contract is more or less efficient and effective depends on how well it deals with these asymmetries. Much of the modern theory of banking and other forms of finance addresses these issues head-on, and the importance and richness of this approach is evidenced by the awarding of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2016 to Professors Bengt Holmström and Oliver Hart for their contributions to contract theory, including its application to the proper mix of debt and equity financing and efficient debt contracts.