Studies Of Private Loans Based On Pricipal-Agent Theory

Loans are commonly seen in our daily life. Variours types of things ranging from as personal as credit cards and house mortgages to as political as government deficits are all derivatives of the single concept of loan. With the development of the socialist market economy in China, currencies provided by financial institutions that granted by law the permission to run loaning business can no longer fulfill the growing financing needs of numerous economic entities. Thus, private loans surfaced as an important supplement to the formal lending market of China in the early 21st century and kept accelerating its speed of expansion since then.Despite the rapid growth of private loans, the behavior of loaners and borrowers remains hard to analyze due to its informality and covertness. While understanding them is critical for the government to supervise the private lending market. In this paper we bypass the onerous work to create an exclusive model to describe private loaning by adopting the principal-agent theory to study the relationships between loaners and borrowers. Theoratically we could see loaners as principals and borrowers as agents, therefore establish a model using similar methods as the principal-agent model to explain certain behaviors of loaners and borrowers in private loaning relationships.