Entrepreneurial Bankruptcies and Moral Hazards at the times of prosperity and Crisis: An Artificial Intelligence Model Application to PLS and Debt Financing

In this paper we try to compare the performnace of profit and loss sharing contract and debt contracts in the face of economic crisis such as Covid 19. Our approch relies on an artificial intelligence model using Netlogo to predict the probability of defaults (banckrupcies) of entrepreneurial contracts. We have found simulation evidence that PLS contracts have lower number of defaults than debt contracts during a crisis. The fact that PLS contracts provide the advantage of sharing losses reduces the chances of banckrupcies compared to debt contracts where the entreprenurs bears wholly the risk of projects failure. On the other hand we found that Debt contracts provide less banckrupcies during normal conditions. This suggest that failure of PLS contracts is not only due to economic conditions but to high level of moral hasard.