Recourse Loans and Ponzi Schemes

Mario R. Pascoa and Abdelkrim Seghir
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Mario R. Pascoa: University of Surrey
Abdelkrim Seghir: Ajman University

No 719, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Non-recourse borrowing leaves no room for Ponzi schemes, as shown by Araujo, Pascoa and Torres-Martinez (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: (i) 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 (ii) for a nominal promise backed by real collateral (such as mortgages, whose payments are not tied to a commodity price index).

JEL-codes: D52 D53 G33 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-03
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0719

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