Harsh default penalties lead to Ponzi schemes: a counterexample

Martins-da-Rocha, V.F. and Vailakis, Y. (2012) Harsh default penalties lead to Ponzi schemes: a counterexample. Games and Economic Behavior, 75(1), pp. 277-282. (doi: 10.1016/j.geb.2011.10.004)

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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.

Item Type:Articles
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:Games and Economic Behavior

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