Gift exchange anomaly: evidence from incentives vis-à-vis performance of Islamic insurance operators

Abstract

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.

Keywords:

• gift exchange
• Islamic insurance
• takaful
• optimal contracting
• prosocial behaviour
• other regarding

JEL Classification:

• C12
• D63
• J41

Notes

¹ The relationship is usually modelled as x = e + ϵ, where ϵ is normally distributed with zero mean and constant variance.

² See Charness and Kuhn (2011) for a detailed discussion on external validity of laboratory outcomes and related issues.

³ Islam prohibits risk transfer against a premium and allows cooperative risk sharing. Islamic insurance therefore is somewhat similar to cooperative insurance.

⁴ The higher the premium, the higher is the total wage bill (as TOs receive a fixed percentage of premiums raised), which encourages poor underwriting.