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A Note on Islamic Economics
methodological progress in the field of behavioral and experimental economics
could be helpful. Developments in the field of ‗bounded-rationality‘ would be
worth studying to see if useful results could be obtained by extending the present
understanding of this field in terms of cognitive constraints on rational behavior to
constraints originating from the behavioral rules of Islam. Recent efforts to explain
the wide income differentials among countries, or why some economies grow and
others stagnate, have brought much attention to the role of institutions. In particular,
two sets of institutions have been identified as crucially important: institutions
that protect property rights and those that enforce contracts. New Institutional
Economics—particularly as it is being extended to understanding ideology—
seems to hold promises of fruitful investigation for Islamic economics since Islam
is rules-based and the New Institutional Economics defines institutions in terms
of rules and norms. Research work in this area could be extended to understand
Islamic economic institutions and to analyze the extent or even existence of these
institutions and their operation at the present in Muslim societies. To create an
incentive structure for the establishment of new institutions compatible with Islamic
objectives would be another fruitful line of inquiry. Developments in the field of
contract theory seem to provide a fertile ground for investigation as the institution
of contracts is of primary importance within the constellation of behavioral rules
of Islam. A potentially useful area of inquiry is investigation of applicability of the
concept of ‗incentive compatibility‘ in structuring contracts as well as organizing
new Islamically-compatible institutions. Similarly, the closely related concepts of
‗trust‘, ‗commitment‘, and ‗reciprocity‘, which are being investigated in a variety
of settings, could provide useful grounds for operationalizing the understanding
of interpersonal relationships in Muslim societies which play a key role in the
fostering of institutions. Information economics has yielded important results,
applicable mainly to situations where there are limitations and constraints on the
availability of information. While the findings of information economics have
already played a useful role in Islamic finance, a more general application of these
insights in other areas of Islamic economics would be no doubt productive. 20
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