Harsh default penalties lead to Ponzi schemes: A counterexample

Martins-da-Rocha, Victor-Filipe; Vailakis, Yiannis

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

Number

Publisher

Elsevier

Pages

277-282

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