On Ponzi schemes in infinite horizon collateralized economies with default penalties

Martins-da-Rocha, V.F. and Vailakis, Y. (2012) On Ponzi schemes in infinite horizon collateralized economies with default penalties. Annals of Finance, 8(4), pp. 455-488. (doi:10.1007/s10436-012-0209-y)

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Abstract

We show, by means of an example, that in models where default is subject to both collateral repossession and utility punishments, opportunities for doing Ponzi schemes are not always ruled out and (refined) equilibria may fail to exist. This is true even if default penalties are moderate as defined in Páscoa and Seghir (Game Econ Behav 65:270–286, 2009). In our example, asset promises and default penalties are chosen such that, if an equilibrium does exist, agents never default on their promises. At the same time collateral bundles and utility functions are such that the full repayment of debts implies that the asset price should be strictly larger than the cost of collateral requirements. This is sufficient to induce agents to run Ponzi schemes and destroy equilibrium existence.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Vailakis, Professor Yiannis
Authors: Martins-da-Rocha, V.F., and Vailakis, Y.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Annals of Finance
Publisher:Springer
ISSN:1614-2446
ISSN (Online):1614-2454

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