With additional enforcement mechanisms,does Collateral avoid Ponzi Schemes ?

Thiago Revil and Juan Pablo Torres-Martinez ()
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Thiago Revil: Department of Economics, PUC-Rio

No 545, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: In infinite horizon incomplete market economies, Ponzi schemes are avoided and equilibrium exists when collateral repossession is the only mechanism enforcing borrowers not to entirely default on their promises. In these economies, we add default enforcement mechanisms that are effective, i.e. induce payments besides the value of collateral guarantees. We prove that, independently of prices, the individual’s problem does not have a physically feasible solution when collateral guarantees are not large enough relative to the effectiveness of the additional enforcement mechanisms. We also show that this result does not depend on specific types of such mechanisms, as long as they are effective.

Keywords: Effective default enforcements; Collateral repossession; Individual’s optimality. (search for similar items in EconPapers)
JEL-codes: D50 D52 (search for similar items in EconPapers)
Pages: 14p
Date: 2007-07, Revised 2008-04
New Economics Papers: this item is included in nep-dge
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Working Paper: With Additional Enforcement Mechanisms, does Collateral Avoid Ponzi Schemes? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:rio:texdis:545

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