Recourse loans and Ponzi schemes

Mário R. Páscoa () and Abdelkrim Seghir
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Mário R. Páscoa: University of Surrey
Abdelkrim Seghir: Ajman University

Economic Theory, 2020, vol. 70, issue 2, No 7, 527-550

Abstract: Abstract Non-recourse borrowing leaves no room for Ponzi schemes, as shown by Araujo et al. (Econometrica 70:1613–1638, 2002). This is not the case with recourse loans, for which, in the event of default and on top of the foreclosure of the collateral, the debtor’s estate can be seized or (in a way common in the GE literature) the debtor can suffer utility penalties. We focus on the latter and show that infinite horizon equilibrium with recourse exists in some interesting cases: (1) if utility penalties are low enough and the collateral does not yield utility (for example, when it is a productive asset or a security) or (2) for a nominal promise backed by real collateral (such as mortgages, whose payments are not tied to a commodity price index).

Keywords: Collateral; Ponzi schemes; Incomplete markets (search for similar items in EconPapers)
JEL-codes: D52 D53 G33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00199-019-01218-3

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