This paper extends the literature on the association between bank performance and risk-taking with directors’ busyness in concentrated ownership and weak-external governance regimes. We argue that a quadratic model parsimoniously captures the tension between the ‘reputation hypothesis’ and ‘over-boarding hypothesis. We find a robust inverted u-shaped relationship between directors’ busyness and bank performance and a u-shaped relationship between directors’ busyness and bank risk-taking. Inside directors’ busyness has a significant effect on bank performance and risk-taking whereas independent directors’ busyness does not have a significant effect on performance and risk-taking. We calculate the optimal level of busyness where the reputation hypothesis dominates the over-boarding hypothesis at less than the optimal level of busyness and vice versa. This allows us to reconcile the mixed evidence in the literature on the relationship between busyness and performance/risk-taking.

The discipline of economics started as a moral science but became detached from moral concerns over time to emulate natural science and to adopt positivism. Consequently, mainstream economics assumes people to be sordidly selfish. The teachings of Islam, however, promote social preferences where individuals should be other-regarding and have preferences over social outcomes. This paper replaces the selfish agent with a social agent and presents the results in a theorem referred to as the third fundamental theorem of welfare economics (TFTWE). The TFTWE states that “when the selfish agents are replaced with the social agents, market outcomes are Pareto optimal, equitable, and unique”. This is an important result which has widespread implications. We show that the TFTWE holds under conditions where the first two fundamental theorems of welfare economics fail and that a Walrasian equilibrium is more likely to exist when selfish preferences are non-convex. Unlike the popular convention, there is no equity-efficiency trade-off. In fact we point to the possibility of reversal in equity-efficiency trade-off.

We use a unique dataset in the Pakistan Socio-Economic Survey (PSES) to measure sense-of-achievement, sense-of-freedom-to-achieve, and sense-of-ability-to-achieve which quantifies Sen's functioning, freedom and conversion efficiency respectively for an overall functioning of 'being achieved'. We show that the PSES capability indicators of subjective well-being (SWB) provide distinctive information while together with the happiness indicator they capture additional insights about SWB which is lacking in human development index (HDI) as shown by a comparison of districts ranking on the basis of HDI and SWB indices. Moreover, we find that the capabilities of 'being achieved' are the most important and stable determinants of happiness vis-à-vis income and education.

This article provides evidence on the gift exchange anomaly using standard field data on the performance of Islamic insurance (takaful) operators (TOs). Takaful is a type of mutual insurance where policyholders insure each other and hire an operator to manage operations against a hybrid of financial incentives. These incentives include an upfront agency fee, which is found to have an inverted U-shaped relationship with performance of TOs. We use our results to identify an optimal hybrid contract for TO and find optimal agency fee as a percentage of net earned premium.

The relationship between policyholders and an Islamic insurance (takaful) operator is in essence a principal-agent relationship. This paper analyzes the power of incentives offered to takaful operators in mitigating problems associated with such a relationship. These incentives include wakalah, an upfront agency fee as a percentage of premiums; mudarabah, a share in investment income from technical reserves; and surplus-sharing (a share in the insurance surplus). The paper concludes that all incentives offered to takaful operators must include surplus-sharing and that offering mudarabah in the presence of surplus-sharing is optimal only when the risk-adjusted return on investing technical reserves outweighs a similar return on effort exerted in underwriting risks. A wakalah hybrid is also recommended as it induces the operator to increase the size of the pool that, in turn, reduces average risk to the benefit of policyholders.

his paper reflects on some of the consequences of replacing debt-based financing with equity-based financing and alludes to some testable hypothesis and theoretical and philosophical debates for future research.

This article highlights that the primary architecture of the conventional financial system induces financial crises as it does not legally “tie the knot” between nominal and real transactions. This legal binding would require replacing interest-based mechanisms with an arrangement where nominal transactions are backed up by real transactions and a ban on securitisation of nominal assets that is based on the principles of risk transferring rather than risk sharing. The argument underlying our contention is that the extent of the negative impact of any crisis would be proportional to the gap between the nominal and real economy, and the mechanisms governing the distribution of risk. That is why, as advocated by proponents of Islamic Finance, the Islamic financial sector showed resilience during the global financial crisis (GFC). There is however no serious academic effort that formally presents the case of Islamic Finance. This article intends to fill this gap by taking stock of the literature on GFC and relates the discussion to the financial architecture proposed in Islamic finance.

The ratio of retirees to workers in developed countries is expected to increase sharply in the next few decades. In the presence of unfunded income support policies, this increase in old age dependency is expected to increase the future fiscal burden of ageing, which is seen as a threat to living standards. Private intergenerational transfers in the form of bequests are also expected to increase in ageing societies, which may offset the adverse effects of the fiscal burden of population ageing on future living standards. This paper quantifies the ability of these private intergenerational transfers to offset the future fiscal burden of ageing in Australia. This is done through developing a dynamic overlapping generations simulation model with realistic demographics. Calculations based on steady-state simulations (with a pay-as-you-go tax rate equal to 3.3% of GDP) suggest that a bequest to GDP ratio of 1% offsets approximately one-third of the fiscal burden over the lifecycle when measured as a proportion of simple labour income and one-eleventh of the fiscal burden when measured as a proportion of full income (labour income plus leisure). The model is calibrated for Australia under a small open economy assumption such that the optimal solution mimics important cross-sectional and time-series fundamentals of the Australian economy. For the non-steady-state, intergenerational accounting suggests that the empirically plausible intergenerational transfers are strong enough to offset most of the tax burden (80–90%) when measured as a percentage of simple labour income and up to one-quarter of the burden when fiscal burden is measured as a percentage of full income.