On Ponzi schemes in infinite horizon collateralized economies with default penalties

V. Filipe Martins-da-Rocha and Yiannis Vailakis

Annals of Finance, 2012, vol. 8, issue 4, 455-488

Abstract: 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. Copyright Springer-Verlag Berlin Heidelberg 2012

Keywords: Collateral; Default penalties; Ponzi schemes; 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 (2)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10436-012-0209-y (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: On Ponzi schemes in infinite horizon collateralized economies with default penalties (2012)
Working Paper: On Ponzi schemes in infinite horizon collateralized economies with default penalties (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:8:y:2012:i:4:p:455-488

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-012-0209-y

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().