This paper analyzes agency costs, net worth, and business fluctuations, focusing on how the condition of borrowers' balance sheets affects investment and business cycles. Agency costs arise from divergent objectives between managers and shareholders, and are primarily due to information asymmetry. These costs include monitoring costs and the costs of mitigating agency problems, such as financial statements or stock options. The paper uses a stochastic neoclassical growth model with aggregate productivity shocks and rational expectations. It introduces an overlapping generations model with two periods, where individuals live for two periods and save to finance consumption in the second period. Entrepreneurs have access to investment technology, while lenders do not. The model incorporates asymmetric information, where only entrepreneurs know the returns of their projects, and lenders can audit projects at a cost. The paper demonstrates how the net worth of borrowers affects agency costs and business fluctuations. Higher net worth reduces agency costs, leading to increased investment and amplifying business cycles. Shocks that affect net worth can initiate fluctuations. The model shows that when entrepreneurs have sufficient savings, they can invest without auditing, reducing agency costs. However, when savings are insufficient, auditing becomes necessary, increasing agency costs. The paper also shows that the supply and demand for capital are affected by the level of net worth and the presence of asymmetric information. When there is imperfect information, the supply of capital is lower, and the number of profitable projects is reduced. The paper highlights the importance of internal funds in reducing agency costs and improving investment decisions. It also shows that changes in income, labor endowments, and productivity shocks can affect net worth, investment, and agency costs, leading to countercyclical agency costs. The paper concludes that agency costs are a crucial mechanism in financial frictions and business cycles.This paper analyzes agency costs, net worth, and business fluctuations, focusing on how the condition of borrowers' balance sheets affects investment and business cycles. Agency costs arise from divergent objectives between managers and shareholders, and are primarily due to information asymmetry. These costs include monitoring costs and the costs of mitigating agency problems, such as financial statements or stock options. The paper uses a stochastic neoclassical growth model with aggregate productivity shocks and rational expectations. It introduces an overlapping generations model with two periods, where individuals live for two periods and save to finance consumption in the second period. Entrepreneurs have access to investment technology, while lenders do not. The model incorporates asymmetric information, where only entrepreneurs know the returns of their projects, and lenders can audit projects at a cost. The paper demonstrates how the net worth of borrowers affects agency costs and business fluctuations. Higher net worth reduces agency costs, leading to increased investment and amplifying business cycles. Shocks that affect net worth can initiate fluctuations. The model shows that when entrepreneurs have sufficient savings, they can invest without auditing, reducing agency costs. However, when savings are insufficient, auditing becomes necessary, increasing agency costs. The paper also shows that the supply and demand for capital are affected by the level of net worth and the presence of asymmetric information. When there is imperfect information, the supply of capital is lower, and the number of profitable projects is reduced. The paper highlights the importance of internal funds in reducing agency costs and improving investment decisions. It also shows that changes in income, labor endowments, and productivity shocks can affect net worth, investment, and agency costs, leading to countercyclical agency costs. The paper concludes that agency costs are a crucial mechanism in financial frictions and business cycles.