Harsh default penalties lead to Ponzi schemes: A counterexample

V. Filipe Martins-da-Rocha and Yiannis Vailakis

Games and Economic Behavior, 2012, vol. 75, issue 1, 277-282

Abstract: Páscoa and Seghir (2009) presented two examples to show that in the presence of utility penalties for default, collateral requirements do not always eliminate the occurrence of Ponzi schemes and equilibria may fail to exist. This paper aims at providing a counterexample to their claim. We show that in the examples they consider, a competitive equilibrium with no trade can be supported due to unduly pessimistic expectations on asset deliveries.

Keywords: Infinite horizon economies; Default penalties; Collateral; Ponzi schemes; Pessimistic expectations; No-trade (search for similar items in EconPapers)
JEL-codes: D52 D91 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:75:y:2012:i:1:p:277-282

DOI: 10.1016/j.geb.2011.10.004

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