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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

Type
Article accepté pour publication ou publié
Date
2012
Journal name
Games and Economic Behavior
Volume
75
Number
1
Publisher
Elsevier
Pages
277-282
Publication identifier
http://dx.doi.org/10.1016/j.geb.2011.10.004
Metadata
Show full item record
Author(s)
Martins-da-Rocha, Victor-Filipe cc
Vailakis, Yiannis
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 / Keywords
Infinite horizon economies; Default penalties; Collateral; Ponzi schemes; Pessimistic expectations; No-trade
JEL
D52 - Incomplete Markets
D91 - Intertemporal Household Choice; Life Cycle Models and Saving

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