Abstract and Keywords
The purpose of this article is to analyze the conceptual treatment of the Iska by the Talmud and medieval post-Talmudic scholars (Rishonim), especially as it relates to risk and incentives. What follows is a discussion on the Talmudic concepts of Biblical and rabbinic interest, known as ribbit and avak ribbit, respectively, since these are central to the Talmudic formulation of the Iska. Modern economics and finance scholars view interest on a loan as being composed of three components: a component that reflects the real time value of money and a component that reflects the credit risk of the loan. This article also explains the biblically proscribed interest known as ribbit. Risk and incentives in the Iska is explained in detail. The Talmud still saw a potential interest problem with the fifty/fifty allocation, since the active partner would be working for the silent partner's equity portion in addition to the work undertaken for his own capital input. A discussion on incentive contracts concludes this article.
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