Optimal incentive contract in SMEs credit market

The asymmetric information between SMEs and banks can result in moral hazard in SMEs credit market in China. In order to reduce the moral hazard this paper designs and analyzes incentive contract which can satisfy the participation constraint and incentive compatibility constraint of SMEs. The analysis result shows, by designing the interest rate and collateral value, banks can guide SMEs to invest the project that banks like, and the interest rate varies inversely with collateral value which means there is substitution effect between interest rate and collateral value for SMEs.