INTEGRATING FATANAH INTO CONDITION 3 OF THE HUSTON–SPENCER ADVERSE SELECTION MODEL: EFFECTS ON INFORMATION UNCERTAINTY AND EQUILIBRIUM
DOI:
https://doi.org/10.35631/AIJBES.829087Keywords:
Adverse Selection, Asymmetric Information, Fatanah, Huston–Spencer Model, Islamic EconomicsAbstract
Asymmetric information may generate adverse selection when buyers cannot distinguish the true quality of goods, and Huston and Spencer showed that the range of quality that buyers cannot distinguish determines whether the lemons problem persists; nevertheless, the model excludes the Islamic value dimension that could explain how such uncertainty is reduced. Accordingly, this study aims to integrate Fatanah into Condition 3 of the Huston–Spencer adverse selection model through the development of a conceptual mathematical model that reproduces the original equilibrium formula and Condition 3 without altering them, introducing Fatanah as a normalised variable that acts through the quality range rather than through the buyer's valuation parameter. The proposed functional form yields , so the range eventually satisfies , the boundary at which Condition 3 ceases to hold and buyers become sufficiently informed, moving the equilibrium out of the lemons region; the proposed model thus provides a formal Islamic economic interpretation of Fatanah as an information-enhancing mechanism capable of reducing adverse selection.
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