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On Ponzi schemes in infinite horizon collateralized economies with default penalties

Martins-da-Rocha, Victor-Filipe; Vailakis, Yiannis (2012), On Ponzi schemes in infinite horizon collateralized economies with default penalties, Annals of finance, 8, 4, p. 455-488. http://dx.doi.org/10.1007/s10436-012-0209-y

Type
Article accepté pour publication ou publié
Date
2012
Journal name
Annals of finance
Volume
8
Number
4
Publisher
Springer
Pages
455-488
Publication identifier
http://dx.doi.org/10.1007/s10436-012-0209-y
Metadata
Show full item record
Author(s)
Martins-da-Rocha, Victor-Filipe cc
Vailakis, Yiannis
Abstract (EN)
We show, by means of an example, that in models where default is subject to both collateral repossession and utility punishments, opportunities for doing Ponzi schemes are not always ruled out and (refined) equilibria may fail to exist. This is true even if default penalties are moderate as defined in Páscoa and Seghir (Game Econ Behav 65:270–286, 2009). In our example, asset promises and default penalties are chosen such that, if an equilibrium does exist, agents never default on their promises. At the same time collateral bundles and utility functions are such that the full repayment of debts implies that the asset price should be strictly larger than the cost of collateral requirements. This is sufficient to induce agents to run Ponzi schemes and destroy equilibrium existence.
Subjects / Keywords
Collateral; Default penalties; Ponzi schemes
JEL
D52 - Incomplete Markets
D91 - Intertemporal Household Choice; Life Cycle Models and Saving

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