Risk-sharing Contracts Research Articles

Financial intermediation through risk sharing vs non-risk sharing contracts, role of credit risk, and sustainable production: evidence from leading countries in Islamic finance.

The asset side of Islamic banks has two different portfolios running side by side, namely risk-sharing (PLS) and non-risk sharing (non-PLS) financing. The segregation of PLS and non-PLS financing has gathered some attention recently owning to its relative importance for sustainable economic output. This study attempts to analyze the impact of decomposed Islamic financing modes (PLS and non-PLS) with a particular focus on their impact on real economic activity. In addition, we moderated the relationship with asset quality of aggregate Islamic banking sector. Quarterly data from 2014 to 2021 have been sourced from datasets of the Islamic financial service board (IFSB), the International Monetary Fund (IMF), World Bank, and Central banks' data streams. Eleven countries have been selected based on the highest local and globalshare in global Islamic financial assets. Panel data regression model has been used in this study. The findings indicate that PLS financing is a weaker driver to channelize funds. However, industrial production output is significantly affected by non-PLS financing. Further the results suggest, Islamic finance-output nexus found to have a stronger relationship in the presence of higher asset quality of Islamic banks. The results show that firms mostly rely on non-PLS financing, due to reduced asymmetry and higher transparency in non-PLS contracts compared to PLS modes. The results have implications for governing bodies of Islamic financial system in boosting risk-sharing contracts and firms to limit agency conflicts arising from fluctuating cost of financing.

The Economic Sustainability of Variable Renewable Energy Considering the Negotiation of Different Support Schemes

The increase in the prices of fossil fuels and environmental issues are leading to a high investment in wind power and solar photovoltaic all over Europe, reducing its dependence on imported fossil fuels. The European countries started incentive programs for investment in these renewable technologies, which consisted of fixed and market premium feed-in tariffs. These feed-in schemes involve long-term contracts with updated prices over inflation. These incentives highly increase the investment and installation of new renewable capacity in Europe. They lead to high renewable penetrations in power systems but originate a tariff deficit due to the difference between market prices and the tariffs paid to these technologies. End-use consumers pay the tariff deficit on retail tariffs. This work analyzes the market-based remuneration of variable renewable energy considering different support schemes and the role of risk-sharing contracts in mitigating the spot price volatility. It presents models able to negotiate bilateral contracts considering risk management, notably risk attitude and risk sharing, bid establishment, and clause (by-laws) negotiation. Furthermore, to evaluate the economic sustainability of renewable generation in Spain, it presents a study for different 12-year support schemes starting in 2010. The results confirmed that, in the case of using risk-sharing contracts during crisis periods, the incidence of low energy prices (price “cannibalization”) decreases, such as the tariff deficit. Furthermore, in the case of high-inflation periods, these contracts hedge against the increase in retail prices, resulting in an economic surplus for consumers.

Risk-Sharing Contracts and risk management of bilateral contracting in electricity markets

The liberalization of the electricity sector has conducted to the establishment of spot markets, derivative markets and private bilateral contracts to trade electricity, increasing the competition in the sector. Spot markets are composed of day-ahead, intraday and real-time markets, and their prices are highly volatile. Derivative markets are composed of physical and financial products to hedge against spot price volatility. Players can set the terms and conditions of private bilateral contracts but these have several risks that can be mitigated using a risk management process composed of three phases: risk assessment, characterization and hedging. This paper focuses on both risk attitude and risk-sharing, and how they can influence the negotiation of the price. It presents the standard and non-standard designs of a new type of contract, the Risk-Sharing Contract (RSC). Furthermore, it describes the trading process of these contracts and introduces a negotiation strategy for dealing with risk. It also presents case studies on bilateral contracting involving the negotiation of RSCs, where different demand and supply agents interact and trade according to the rules of an alternating offers protocol. Results from the case studies prove the benefit of RSCs to hedging against spot price volatility, benefiting risk-averse players by reducing the price risk and conducting mutually beneficial agreements. While the use of derivatives products can conduct losses/revenues between −15% and 3% concerning the spot market, by using non-standard RSCs those outputs vary between −1% and 3% with substantially less risk.

CAMELS, risk-sharing financing, institutional quality and stability of Islamic banks: evidence from 6 OIC countries

PurposeThis study aims to examine the nexus between CAMELS, risk-sharing financial performance and Islamic banks' stability. It also attempts to assess the conditioning effects of institutional quality in the relationship between risk-sharing contracts and the stability of Islamic banks.Design/methodology/approachThe quantitative research design was employed using secondary data from 20 Islamic banks in six countries over the period 2007–2019. The study utilized the feasible generalized least squares method for the analysis.FindingsThe results indicate that not all CAMELS variables support the stability of Islamic banks. The musharakah contract induced stability of the banks, whereas mudarabah financing reduced it. The interaction between risk-sharing finance and the quality of institutions suggested that the mudarabah contract via institutional quality raises the stability of Islamic banks. On the other hand, the quality of institutions encourages the banks to offer more musharakah, but it leads to an increase in their risk-taking. We show the impact of changes in risk-sharing variables on stability amplified by institutional quality. The results were robust when alternative measures of stability were used.Practical implicationsVarious stakeholders in banking activities could learn from the results of this study. Islamic banks could improve their positions in terms of screening for risk-sharing financing. They could also leverage more on musharakah, as it promotes stability and could generate more returns for the banks. The mudarabah financing can be improved if there is a proper evaluation of entrepreneurs. Policymakers would learn more about the importance of institutional quality, as it provides a friendly environment for both mudarabah and musharakah businesses to thrive. This could increase the participation of Islamic banks in the real economy.Originality/valuePrevious studies concentrated on the effects of CAMELS on the profitability of Islamic banks. This study shows that CAMELS alone might not necessarily capture the financial performance of Islamic banks. Therefore, the risk-sharing financing variables are included alongside CAMELS to determine their effects on stability. Second, unlike the past research, this study used the quality of institutions to moderate the nexus between risk-sharing financing and the stability of Islamic banks.

Risk sharing vs risk shifting: a comparative study of Islamic banks

PurposeThis study aims to compare the use of risk-sharing and risk-shifting contracts (RSFCs) in Islamic banks using a triple grouping of conservative, moderate and liberal Islamic banks based on the Khaled Khandelwal (KK) model. Six fundamental Islamic contracts are used in this study, namely, Mushãrakah, Mudãrabah, Murãbaha, Salam, Ijãrah, Istisnã. Mushãrakah and Mudãrabah represent profit and loss sharing contracts (i.e., risk-sharing contracts – RSHCs), whereas Murãbaha, Salam, Ijãrah and Istisnã represent RSFCs. This study extends the previous studies by addressing an issue that has been neglected in the literature. The extent to which the two groups of contracts are used is extremely important because of its effect on the valuation of Islamic banks and on their earning quality.Design/methodology/approachThis study aims to analyze, using descriptive statistics and inferential statistics, the use of RSHCs and RSFCs made by 72 fully Islamic banks, using a sample that includes banks in most of the countries where Islamic banks are present. Only fully Islamic Banks were considered, that is, banks that are essentially mainstream banks; therefore, banks that include only a specific line of Islamic products, often called the Islamic Window, were excluded. The total number of the sample was 118, but the study was restricted to 72 banks due to the availability of time series data covering the period of study, 2007 to 2015.FindingsThe study documents that over the period 2007 to 2015 the moderate banks have better distribution and balance of RSHCs and RSFCs than the conservative and liberal banks. The conservative banks are found to depend greatly on RSFCs, whereas the liberal banks are found to depend almost completely on RSFCs. Unexpectedly, the conservative banks have not shown a noticeable improvement over the period of analysis on their level of reliance on RSHCs. The results show that there is a significant difference in the percentage income distribution of the two contracts between the moderate banks and the conservative banks and between the moderate banks and the liberal banks. However, no significant difference was found between the conservative banks and the liberal banks.Originality/valueThe study uses an alternate rating model for Islamic financial institutions. The study examined the issue of risk sharing and risk shifting contracts usage in banks for a long period of nine years and at a global level and with an additional dimension of three categories of Islamic Banks based on the KK model.

Supply Chain Coordination for E-Commerce: Risk Penalty vs. Flat Rate

Problem definition: We study the coordination of an E-commerce supply chain between online sellers and third party shippers to meet random demand surges, induced by, for instance, online shopping holidays. Academic/practical relevance: Motivated by the challenge of meeting the unpredictable demand surges in E-commerce, we study shipping contracts and supply chain coordination between online sellers and third party shippers in a novel model taking into account the unique features of the shipping industry. Methodology: We compare two shipping contracts: the risk penalty (proposed by UPS) and the flat rate (used by FedEx), and analyze their impact on the seller, the shipper, and the supply chain. Results: Under information symmetry, the sophisticated risk penalty contract is no better than the simple flat rate contract for the shipper, against common belief. Although both the risk penalty and the flat rate can coordinate the supply chain, the risk penalty does so only if the shipper makes zero profit, but the flat rate can provide a positive profit for both. These results represent a new form of double marginalization and risk-sharing, in sharp contrast to the well-known literature on the classic supplier-retailer supply chain, where risk-sharing contracts (similar to the risk penalty) can bring benefits to all parties, but the single wholesale price contract (similar to the flat rate) can achieve supply chain coordination only when the supplier makes zero profit. We also find that only the online seller, but not the shipper, has the motivation to vertically integrate the seller-shipper supply chain. Under information asymmetry, however, the risk penalty brings more benefit to the shipper than the flat rate, but hurts the seller and the supply chain. Managerial implications: Our results imply that information plays an important role in the shipper’s choices of shipping contracts. Under information symmetry, the risk penalty is unnecessarily complex because the simple flat rate is as good as the risk penalty for the shipper; moreover, it is better for the seller-shipper coordination. However, under information asymmetry, the shipper faces additional shipping risk that can be offset by the extra flexibility of the risk penalty. Our study also explains and supports the recent practice of online sellers (e.g., Amazon.com and JD.com), but not shippers, to vertically integrate the supply chain by consistently expanding their shipping capabilities.

Collaborative risk management in decentralised multi-tier global food supply chains: an exploratory study

PurposeThe aim of this paper is to explore the value of collaborative risk management in a decentralised multi-tier global fresh produce supply chain.Design/methodology/approachThis study utilised a mixed methods approach. A qualitative field study was conducted to examine the need for collaborative risk management. The simulation experiments with industry datasets were conducted to assess whether risk-sharing contracts work in mitigating joint risks in parts of and across the supply chain.FindingsThe qualitative field study revealed risk propagation and the inefficiency of company-specific risk management strategies in value delivery. The simulation results indicated that risk-sharing contracts can incentivise various actors to absorb interrelated risks for value creation.Research limitations/implicationsThe research is limited to risks relevant to supply chain processes in the Australia–China table grrape supply chain and does not consider product-related risks and the risk-taking behaviours of supply chain actors.Practical implicationsCollaborative risk management can be deployed to mitigate systematic risks that disrupt global fresh produce supply chains. The results offer evidence-based knowledge to supply chain professionals in understanding the value of collaborative risk assessment and management and provide insights on how to conduct collaborative risk management for effective risk management.Originality/valueThe results contribute to the supply chain risk management literature by new collaborative forms for effective risk management and strategic competition of “supply chain to supply chain” in multi-tier food supply chains.

Buyback and risk-sharing contracts to mitigate the supply and demand disruption risks

Events like the recent COVID-19 create major disruptions in global supply chains. Companies find it difficult to manage business continuity under supply uncertainties and disruptions. This paper investigates the buyer's optimal ordering decisions under stochastic demand, supply uncertainty, and disruption risks. We consider a two-echelon supply chain consisting of a single buyer and two suppliers. The main supplier is cheaper, but exposed to the risks of random yield and disruption. The backup supplier is perfectly reliable, but relatively expensive. An analytical model is developed using contract-based mechanisms considering the risks of demand uncertainty, supply disruption, and random yield. Two typologies of contracts with suppliers are considered, namely, risks sharing contract and buyback contract. A numerical study is performed to explore the effects of different parameters on the supply chain members' profits, providing guidelines for managers regarding how the supply chain's risks and demand uncertainty influence the ordering decisions. [Received: 5 November 2019; Accepted: 22 August 2020]

Buyback and risk-sharing contracts to mitigate the supply and demand disruption risks

Buyback and risk-sharing contracts to mitigate the supply and demand disruption risks

The Impacts of Microcredit on Informal Risk Sharing: Experimental Evidence from China

This study examines the impacts of a large-scale government-led microcredit program on informal risk sharing among poor households in rural China based on a randomized controlled trial. The results show that financial inclusion, on average, reduced households’ borrowing from informal financial networks, and informal borrowing decreased substantially among households that were program members, regardless of whether they had borrowed from the program. Further analyses suggest that the program alleviated the dependence on informal financial networks to afford consumption shocks for program members who did not obtain program loans, and the crowding-out effect on informal borrowing existed even during the announcement period of the program for these households. These results are consistent with limited commitment models, which predict that access to microcredit raises the expected value of autarky utility relative to the utility derived from risk-pooling arrangements, and thus reduces the scope of implementable risk-sharing contracts.

PNS68 Innovative, Outcomes-Based Risk-Sharing Contracts As a Solution within the German Amnog Process?

PNS68 Innovative, Outcomes-Based Risk-Sharing Contracts As a Solution within the German Amnog Process?

Challenges and Solutions for Integrating and Financing Personalized Medicine in Healthcare Systems: A Systematic Literature Review

The scope and ambitions of biomedical institutions worldwide currently working toward the integration of personalized medicine (PM) require recognizing the potential profound impact on regulatory standards and on the economic functioning and financing of healthcare. Against this background, researchers and policymakers must manage the arising challenges for the healthcare systems. In this paper we study the literature related to the consequences of PM on health insurance and care systems. Using the PRISMA research protocol, we search the existing body of literature and analyze publications dealing with insurance (419 papers) in the field of PM. After a detailed reading of the 52 studies included in our analysis, we synthesize challenges in three fields that must be addressed to avoid hindering the implantation of PM. The key issues that we highlight concern (1) a lack of clear and consistent data on the economic relevance of PM, (2) a value-oriented and cost-efficient definition of reimbursement thresholds, (3) the implementation of PM in the prevailing healthcare system. In the meantime, we provide several solutions to these concerns; we present (a) risk-sharing contracts that can deal with the emerging coverage challenges, (b) criteria that could constitute future reimbursement thresholds and (c) examples of successful implementations of PM into healthcare systems. Our findings are relevant for policymakers and health insurance companies for redefining the guidelines for the healthcare schemes of the future.

Bilateral Risk Sharing with No Aggregate Uncertainty under Rank-Dependent Utility

This paper studies bilateral risk-sharing with no aggregate uncertainty, when agents maximize rank-dependent utilities. We characterize the structure of Pareto optimal risk-sharing contracts in full generality. We then derive a necessary and sufficient condition for Pareto optima to be no-betting allocations (i.e., deterministic allocations), thereby answering the question of when sunspots do not exist in this economy. This condition depends only on the probability weighting functions of the two agents, and not on their (concave) utility functions.

Bilateral Risk Sharing with Heterogeneous Beliefs and Exposure Constraints

This paper studies bilateral risk sharing under no aggregate uncertainty, where one agent has Expected-Utility preferences and the other agent has Rank-Dependent Utility preferences with a general probability distortion function. We impose exogenous constraints on the risk exposure for both agents, and we allow for any type or level of belief heterogeneity. We show that Pareto-optimal risk-sharing contracts can be obtained via a constrained utility maximization under a participation constraint of the other agent. This allows us to give an explicit characterization of optimal risk-sharing contracts. In particular, we show that an optimal risk-sharing contract contains allocations that are monotone functions of the likelihood ratio, where the latter is obtained from Lebesgue's Decomposition Theorem.

BILATERAL RISK SHARING WITH HETEROGENEOUS BELIEFS AND EXPOSURE CONSTRAINTS

AbstractThis paper studies bilateral risk sharing under no aggregate uncertainty, where one agent has Expected-Utility preferences and the other agent has Rank-dependent utility preferences with a general probability distortion function. We impose exogenous constraints on the risk exposure for both agents, and we allow for any type or level of belief heterogeneity. We show that Pareto-optimal risk-sharing contracts can be obtained via a constrained utility maximization under a participation constraint of the other agent. This allows us to give an explicit characterization of optimal risk-sharing contracts. In particular, we show that an optimal risk-sharing contract contains allocations that are monotone functions of the likelihood ratio, where the latter is obtained from Lebesgue’s Decomposition Theorem.

The Use of Risk-Sharing Contracts in Healthcare: Theoretical and Empirical Assessments.

The aim of this review is to provide a summary of the literature on risk-sharing agreements, including conceptual, theoretical and empirical (number of agreements and their achievements) perspectives, and stakeholders' perceptions. We conducted a systematic literature search in MEDLINE from 2000 to April 2019, following PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses) methodology, and completed it with a manual search of other publications (mainly grey literature). The search was restricted to publications with English abstracts; the initial identification of articles was restricted to the title, abstract and key words fields. The geographical scope was not restricted. Over 20 studies proposed different taxonomies of risk-sharing contracts, which can be summarised as financial and paying-for-performance agreements. Theoretical studies modelling the incentives to implement risk-sharing agreements are scarce; they addressed different types of contracts and regulatory contexts, characterizing the drug prices and the optimal strategies of the involved agents. Empirical studies describing specific agreements are abundant and referred to different geographical contexts; however, few articles showed the economic results and assessed the value of such contracts. Stakeholders' perceptions of risk-sharing contracting were favourable, but little is known about the economic and clinical advantages of specific agreements. Whether risk-sharing contracts have yielded the desired results for healthcare systems remains uncertain. Risk-sharing contracts are increasingly used, although the lack of transparency and aggregated registries makes it difficult to learn from these experiences and assess their impact on healthcare systems.

Implementation of risk-sharing contracts as perceived by Spanish hospital pharmacists

BackgroundConcerns about financial sustainability of health systems have promoted the adoption of risk-sharing agreements. Nevertheless, few insights have been derived, due to their confidentiality. The purpose of this study is to analyze to what extent these agreements have been implemented in Spain and the importance of several clinical and management variables concerning their use. We also explore whether risk-sharing agreements promote the adoption of personalized medicine. We give a descriptive analysis based on a questionnaire sent to members of the Spanish Society of Hospital Pharmacy, asking about the implementation of risk-sharing contracts in their hospitals.ResultsThere were 80 replies. Implementation of risk-sharing agreements was high (90%), being oncology, neurology, dermatology and infectious diseases the main specialties. The most relevant variables were the number of units of medication per year (89%) in price-volume agreements, and the efficacy and uncertainty of treatments (over 75%) in pay-for-performance agreements. Price-volume agreements were suitable for both conventional and personalized medicine and pay-for-performance more specific for personalized medicine. Paying for performance promotes genetic testing (85%).ConclusionsThe results suggest health authorities should encourage the assessment of financial and health outcomes of real-world contracts of conventional and personalized medicine to better know the variables influencing their use.

The 2018 risk-adjustment reform in the Czech Republic: Introducing Pharmacy-based Cost Groups and strengthening reinsurance

BackgroundRisk-adjustment in resource allocation is commonly used for regional redistribution or for eliminating risk selection motives of multiple statutory health insurers. In the Czech Republic, revenue redistribution between health insurers takes place since the 1990′s. Since 2018, the risk-adjustment mechanism includes an adjustment for insured with chronic diseases using Pharmacy-based Cost Group (PCG) classification. In addition, retrospective compensation for very high cost patients has been strengthened. AimTo provide an internationally relevant overview of the Czech risk-adjustment system. To assess the implication of the 2018 reform for health insurers and for the development of chronic care. MethodThe framework of the Health Reform Monitor is used to analyse the policy process. Data from Czech health insurers and Czech Ministry of Health are used to assess likely impact of the reform. ResultsThe reform increases coverage of predictable individual health risks and combines prospective risk-rating with strengthened retrospective risk-sharing among insurers. The reform results in moderate changes in risk-adjusted allocations of individual insurers. ConclusionThe Czech experience with risk-adjustment reforms is relevant for countries with multiple health insurers as well as for countries with risk-adjusted regional redistribution mechanisms. Combining prospective risk factors of age, sex, and PCGs with retrospective compensation of expensive cases limits potential losses to a manageable level, also for small risk-pools. It reduces incentives for cream skimming based on health status, enables higher use of risk-sharing contracts, and incentivizes the development of disease management programs in the Czech Republic.

Modeling an oncology outcomes-based contract using a blockchain database approach: Cost and technology considerations.

e18360 Background: Cost of care is an ongoing concern for all oncology stakeholders. Outcomes Based or Risk Sharing contracts are increasingly discussed, but difficult and costly to implement. The literature notes barriers of outcomes definition, reliable data sources, and technology enablement. The authors sought to design and test software that could enable faster, lower-cost, and auditable administration of such contracts. Methods: The authors developed software using blockchain databases and transactional proof of work to simulate such a contract and to compare the financial result to usual fee-for-service reimbursement (FFSR). The software processed a synthesized Medicare claims dataset and Average Sales Price (ASP) data from 2008-2010, looking for use of the Bevacizumab(BV)/Carboplatin/Paclitaxel(CP) regimen in non-small cell lung cancer (NSCLC). The contract hypothesized a scenario that offered payers a discount for “underperforming” BV doses (defined as doses given to a patient with < 9 mo. BV duration) and required a bonus payment for “overperforming” BV doses (defined as doses given to a patient with > 14 mo. BV duration). These parameters were selected based on survival data supporting the 2007 FDA approval of BV/CP in 1L tx of advanced nonsquamous NSCLC. Results: The software successfully processed the claims dataset and projected financial results (additional/saved cost) to the payer in this hypothetical contract compared to FFSR. The software also enabled comparison of different hypothetical contracts, inclusion/exclusion rules for claims, and discount structures. The software accurately categorized doses according to the defined logic. Conclusions: Outcomes based contracts have potential for better aligning oncology reimbursement with meaningful results, particularly for costly therapeutics and where patient response or outcome is difficult to predict. While such agreements are recognized as difficult to implement, a software platform that facilitates efficient and scalable design, simulation, and implementation of such agreements, under constraints of real world data availability and sharing, may advance their adoption.

A behavioral investigation of supply chain contracts for a newsvendor problem in a developing economy

The business context in developing economies introduces challenges in scaling production that are often distinct from those faced in mature economies. This study focuses on the potential for risk-sharing mechanisms to overcome some of those challenges for agricultural supply chains in Uganda. The study follows a two-stage research approach conducted in collaboration with the United Nations World Food Programme (WFP), which supported adoption of hermetic crop storage products such as silos in the country since 2013. In the first stage, through interviews with six artisanal silo manufacturers we identified three constraints in scaling silo production that were accentuated by the newsvendor dynamics in this market. In the second stage, we considered the potential for risk-sharing contracts to help alleviate some of those constraints and explored behavioral explanations to account for differences. We ran a laboratory experiment using two contracts that our interviews suggest are feasible in this business context: a buyback mechanism that allows manufacturers to share the risks of procuring excess metal sheets and a salvage mechanism that allows them to share the risks of over-producing silos. The results reveal a consistent under-ordering across both contracts. They also show that while buyback participants respond to contract prices as existing theory would predict, salvage participants do not. Our study provides insights regarding the potential, and the limitations, of different risk-sharing mechanisms to increase the supply of products in developing economies.