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On Ponzi schemes in infinite horizon collateralized economies with default penalties

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Date
2012
Dewey
Economie financière
Sujet
Collateral; Default penalties; Ponzi schemes
JEL code
D52; D91
Journal issue
Annals of finance
Volume
8
Number
4
Publication date
2012
Article pages
455-488
Publisher
Springer
DOI
http://dx.doi.org/10.1007/s10436-012-0209-y
URI
https://basepub.dauphine.fr/handle/123456789/10573
Collections
  • CEREMADE : Publications
Metadata
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Author
Martins-da-Rocha, Victor-Filipe
Vailakis, Yiannis
Type
Article accepté pour publication ou publié
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.

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