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Harsh default penalties lead to Ponzi schemes: A counterexample

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Author Info

  • Martins-da-Rocha, V. Filipe
  • Vailakis, Yiannis

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 75 (2012)
Issue (Month): 1 ()
Pages: 277-282

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Handle: RePEc:eee:gamebe:v:75:y:2012:i:1:p:277-282

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Web page: http://www.elsevier.com/locate/inca/622836

Related research

Keywords: Infinite horizon economies; Default penalties; Collateral; Ponzi schemes; Pessimistic expectations; No-trade;

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References

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  1. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304, Cowles Foundation for Research in Economics, Yale University.
  2. Páscoa, Mario Rui & Araújo, Aloísio Pessoa de & Torres-Martínez, Juan Pablo, 2001. "Collateral Avoids Ponzi Schemes in Incomplete Markets," Economics Working Papers (Ensaios Economicos da EPGE) 419, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. Páscoa, Mário Rui & Seghir, Abdelkrim, 2009. "Harsh default penalties lead to Ponzi schemes," Games and Economic Behavior, Elsevier, vol. 65(1), pages 270-286, January.
  4. V. Martins-da-Rocha & Yiannis Vailakis, 2012. "On Ponzi schemes in infinite horizon collateralized economies with default penalties," Annals of Finance, Springer, vol. 8(4), pages 455-488, November.
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Cited by:
  1. V. Martins-da-Rocha & Yiannis Vailakis, 2012. "On Ponzi schemes in infinite horizon collateralized economies with default penalties," Annals of Finance, Springer, vol. 8(4), pages 455-488, November.

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