Modelling and Experimental Testing of Asymmetric Information Problems in Lease and Hire Contracts (Based on Contract Theory)

Abstract

This article aims to study lease and hiring contract in the Iranian-Islamic setting and analyze the asymmetric information problem in these contracts. For doing this, we study the characteristics of lease and hiring contracts in Iran (real world experimental characteristics that recognized in other studies), using library method, then we mathematically model different aspects of asymmetric information (hidden information and hidden action) using contract theory. The result of model indicates that there is a list of optimal contracts in any lease or hiring transactions that can solve asymmetric information problems (adverse selection and moral hazard) by satisfying the participation and incentive compatibility constraints. Finally in the experimental analyses we calculate the optimal contract with hypothetical parameters using lingo software and illustrate that the main models provided for every transactions is solvable and the optimal contracts are obtainable. Experimental contracts shows that the lessor has to set security deposits of tenant type θL lower than tenant type θH and set higher monthly rent for him in lease contracts, and principal has to set wage of tenant type θL lower than tenant type θH and set higher length of contract for him in hiring contracts to solve asymmetric information problems.