Modeling and Experimental Testing of Asymmetric Information Problems in Lease and Hire Contracts: A Study Based on Contract Theory

The present study is to examine lease and hire contracts in the Islamic setting of Iran. The study is further to analyze the asymmetric information problems in relation to these contracts. To this end, the features of lease and hire contracts, experimental characteristics revealed in some previous studies in Iran were examined through the use of library method. Different aspects of asymmetric information, namely hidden information and hidden action, were then mathematically modeled via contract theory. The resultant model indicated a list of optimal lease and hire contracts in transactions which can solve asymmetric information problems, such as adverse selection and moral hazard, through removing participation and incentive compatibility constraints. Finally, the optimal contract was determined with hypothetical parameters in the experimental analyses and through the use of LINGO software. Based on the findings, the main models provided for every transaction were solvable and the optimal contracts were obtainable. Experimental contracts show that the lessor has to set security deposits of tenant type lower than tenant type and set higher monthly rent for tenant type in lease contracts, and principal has to set wage of agent type lower than agent type and set higher length of contract for agent type in hiring contracts to solve asymmetric information problems.