A General Equilibrium Analysis of the Credit Market

I analyse a model of incentive contracts where principals who each possesses the same monitoring technologies, contract with agents from a pool of individuals differing in their wealth endowments. Principals and agents are matched to form partnerships, and the matches are subject to a double-sided moral hazard problems. Agents need to borrow from the principals to finance their projects. In equilibrium, the payoffs to the principals and agents are determined endogenously. The wealthier agents consume higher payoffs, whereas all principals get the same payoff. I further analyse the effects of changes in the monitoring cost and the risk-free interest rate on the optimal monitoring and stock prices.