Harsh default penalties lead to Ponzi schemes: A counterexample
Martins-da-Rocha, Victor-Filipe; Vailakis, Yiannis (2012), Harsh default penalties lead to Ponzi schemes: A counterexample, Games and Economic Behavior, 75, 1, p. 277-282. http://dx.doi.org/10.1016/j.geb.2011.10.004
TypeArticle accepté pour publication ou publié
Journal nameGames and Economic Behavior
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Abstract (EN)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.
Subjects / KeywordsInﬁnite horizon economies; Default penalties; Collateral; Ponzi schemes; Pessimistic expectations; No-trade
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