Harsh default penalties lead to Ponzi schemes: A counterexample

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...

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Bibliographic Details
Published in:Games and economic behavior 2012-05, Vol.75 (1), p.277-282
Main Authors: Martins-da-Rocha, V. Filipe, Vailakis, Yiannis
Format: Article
Language:English
Subjects:
Assets
Collateral
Default penalties
Economic theory
Economics and Finance
Equilibrium theory
Fines & penalties
Fraud
Game theory
Humanities and Social Sciences
Infinite horizon economies
Investment
No-trade
Pessimistic expectations
Ponzi schemes
Ponzi, Charles
Pyramid operations
Studies
Utility theory
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Summary: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. ► This paper aims at providing a counterexample to Páscoa and Seghir (2009). ► We show that a competitive equilibrium with no trade can be supported. ► This is due to unduly pessimistic expectations on asset deliveries.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2011.10.004