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Agency Costs, Net Worth, And Business Fluctuations

Ben Bernanke and Mark Gertler ()

No 292693, SSRI Workshop Series from University of Wisconsin-Madison, Social Systems Research Institute

Abstract: This paper constructs a simple neoclassical model of intrinsic business cycle dynamics in which borrowers' balance sheet positions play an important role. The critical insight is that the agency costs of undertaking physical investments are inversely related to the entrepreneur's/borrower's net worth. As a result, accelerator effects on investment emerge: Strengthened borrower balance sheets resulting from good times expand investment demand, which in turn tends to amplify the upturn; weakened balance sheets in bad times do just the opposite. Further, redistributions or other shocks that affect borrowers' balance sheets (as in a debt-deflation} may have aggregate real effects.

Keywords: Research; Methods/; Statistical; Methods (search for similar items in EconPapers)
Date: 1988-02
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Journal Article: Agency Costs, Net Worth, and Business Fluctuations (1989) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwssri:292693

DOI: 10.22004/ag.econ.292693

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