Reserch On Private Lending Rate Decision Mechanism Based On The Incompletecontract Thory——a Case Of Wenzhou

As interest rate is the core element of the financial markets, private lending rate is a key role in the function of private finance. Private lending rate level and the decision-making mechanism of it has a very important influence in the economic performance of private financial. Moreover, private lending rate is decided by the bargaining process of the demanders and suppliers in the private lending market. Madding it more closely tied to the real market interest rates, therefore, China’s market-oriented interest rate reform must address private lending interest rates. Leading a reasonable private lending rate pricing mechanism means a lot for achieving the standardization of the development of the private lending market, and private funds to better serve China’s social and economic development, and promote the process of China’s market-oriented interest rate under the premise of maintaining financial stability are of great significance.So in this article we take Wenzhou as an example to analyze the linkage mechanism between the formal financial market behavior and the private lending rate. On this basis we proposed the general hypothesis of private lending interest rates and their impact factors. Later, starting from the reality of a number of private small business owners "on foot", a credit game model is constructed in the framework of incomplete contracts, revealing how the variables such as the formal financial market behavior, project benefits, lending urgency of the loan period, borrowers’ operating capacity impact on private lending rate with NASH bargaining resolution. And finally we get the general conclusions about private lending market as following:the relationship of private lending rate and the formal financial interest rate and the expected project income depends on the bargaining power of the debtor. The relationship between private lending rate and loan size depends on the level of interest rate. Private lending rate is proportional to the loan period, the urgency of loan and the transaction costs of the creditor, and inversely proportional to the transaction costs of the debtor.During the process of testing the accuracy of our hypothesis, we find the following phenomenon:there are two kinds of fund demanders in the private lending market of Wenzhou. One put the funds to the production and management channels, the other put the funds to the speculative purposes. The former has a relatively high bargaining power, and able to make choices between the formal market and the private lending market. The latter has a relatively low bargaining power, and has no choice but accept a higher interest rate in the private lending market.