Social norms and incentives

Dr Suren Basov, Dr Ishaq Bhatti

Most research in contract theory concentrated on the role of incentives in shaping individual behavior. Recent research suggests that social norms also play an important role. From a point of view of a mechanism designer (a principal, a government, or a bank) responsiveness of an agent to the social norms is both a blessing and a curse. On one hand, it provides the designer with extra instruments, while on the other it puts restrictions on how these new and the more conventional instruments can be used. Islamic law provides abundance of social norms that can interact with economic incentives to determine the performance of Islamic financial institutions. In our recently published paper we took a first step in systematically studying interaction of social norm and incentives.

Islamic Finance in the Light of Modern Economic Theory

Dr Suren Basov, Dr Ishaq Bhatti

The aim of this project is to understand economic effects of the basic legal tenets of Islamic finance industry using the tools of the modern mechanism design theory. As every student of economics knows, ways in which legal framework translates in real economic restrictions is subtle and is shaped by reactions of economic actors. Therefore one has to model behavioral response of economic actors to understand the true implications of a legal framework.

Ethics in Financial Transactions

Dr Ishaq Bhatti with Abdullah Saeed, Mohamed Arif, and Mervyn Lewis

The question of ethics in financial dealings has been problematic for all societies since the days of bartering. For Christianity's original Good Shepherd, the moment he came closest to not turning the other cheek, was when he threw the money lenders out of the Temple. A modern, global market - if it's to function properly and prosper - must respect deep-rooted feelings and sensitivities common in all societies, faiths and cultures. Greater availability of financial products catering to these needs would help the industry think about, maintain and improve ethical standards generally. This project studies the way Islamic financial products balance ethical concern against the concerns of economic efficiency.