The chapter by Ben Bernanke, Mark Gertler, and Zhe Li explores the relationship between agency costs, net worth, and business fluctuations. The authors argue that the condition of borrowers' balance sheets, particularly their net worth, significantly influences output dynamics and the business cycle. They introduce a model where entrepreneurs face asymmetric information, leading to costly state verification. This model replaces the simple capital production technology with a more complex one that accounts for asymmetric information. Key points include: - **Model Setup**: The economy is infinite, with heterogeneous entrepreneurs and a uniform distribution of禀赋 (endowments). Capital per capita is determined by the number of projects undertaken and the proportion audited. - **Equilibrium Analysis**: The authors analyze both perfect information and asymmetric information scenarios. In perfect information, the equilibrium is straightforward, while in asymmetric information, entrepreneurs must choose between revealing or concealing information, leading to different consumption patterns. - **Full-Collateralization Case**: When entrepreneurs have sufficient net worth, the optimal auditing probability is zero, and consumption is determined by the expected return on investment. - **Incomplete-Collateralization Case**: When entrepreneurs' savings are insufficient, positive auditing probability exists, and consumption is reduced by agency costs. Additional internal funds can reduce these costs. - **Investment Decision**: The optimal investment decision depends on the entrepreneur's type and the expected returns. Fair entrepreneurs, who have positive expected net returns only if no auditing, invest based on their type and the expected relative price of capital. - **Capital Supply and Demand**: The supply curve of capital shifts due to imperfect collateralization, leading to a higher number of profitable projects. The demand curve remains the same, but the supply curve moves closer to the full-collateralization case when there is more entrepreneurial savings. - **Comparative Statics**: A rise in current income or a redistribution of labor endowment affects the supply and demand curves, influencing the capital stock and the price of capital. - **Dynamics**: Productivity shocks temporarily increase investment by boosting entrepreneurial net worth, shifting the supply and demand curves and increasing the capital stock. Overall, the chapter highlights how the interaction between agency costs and net worth can play a crucial role in business cycles and economic fluctuations.The chapter by Ben Bernanke, Mark Gertler, and Zhe Li explores the relationship between agency costs, net worth, and business fluctuations. The authors argue that the condition of borrowers' balance sheets, particularly their net worth, significantly influences output dynamics and the business cycle. They introduce a model where entrepreneurs face asymmetric information, leading to costly state verification. This model replaces the simple capital production technology with a more complex one that accounts for asymmetric information. Key points include: - **Model Setup**: The economy is infinite, with heterogeneous entrepreneurs and a uniform distribution of禀赋 (endowments). Capital per capita is determined by the number of projects undertaken and the proportion audited. - **Equilibrium Analysis**: The authors analyze both perfect information and asymmetric information scenarios. In perfect information, the equilibrium is straightforward, while in asymmetric information, entrepreneurs must choose between revealing or concealing information, leading to different consumption patterns. - **Full-Collateralization Case**: When entrepreneurs have sufficient net worth, the optimal auditing probability is zero, and consumption is determined by the expected return on investment. - **Incomplete-Collateralization Case**: When entrepreneurs' savings are insufficient, positive auditing probability exists, and consumption is reduced by agency costs. Additional internal funds can reduce these costs. - **Investment Decision**: The optimal investment decision depends on the entrepreneur's type and the expected returns. Fair entrepreneurs, who have positive expected net returns only if no auditing, invest based on their type and the expected relative price of capital. - **Capital Supply and Demand**: The supply curve of capital shifts due to imperfect collateralization, leading to a higher number of profitable projects. The demand curve remains the same, but the supply curve moves closer to the full-collateralization case when there is more entrepreneurial savings. - **Comparative Statics**: A rise in current income or a redistribution of labor endowment affects the supply and demand curves, influencing the capital stock and the price of capital. - **Dynamics**: Productivity shocks temporarily increase investment by boosting entrepreneurial net worth, shifting the supply and demand curves and increasing the capital stock. Overall, the chapter highlights how the interaction between agency costs and net worth can play a crucial role in business cycles and economic fluctuations.