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Recourse Loans and Ponzi Schemes

Author

Listed:
  • Mario R. Pascoa

    (University of Surrey)

  • Abdelkrim Seghir

    (Ajman University)

Abstract

Non-recourse borrowing leaves no room for Ponzi schemes, as shown by Araujo, Pascoa and Torres-Martinez (2002). This is not the case with recourse loans, for which, in the event of default and on top of the foreclosure of the collateral, the debtor's estate can be seized or (in a way common in the GE literature) the debtor can suffer utility penalties. We focus on the latter and show that infinite horizon equilibrium with recourse exists in some interesting cases: (i) if utility penalties are low enough and the collateral does not yield utility (for example, when it is a productive asset or a security) or (ii) for a nominal promise backed by real collateral (such as mortgages, whose payments are not tied to a commodity price index).

Suggested Citation

  • Mario R. Pascoa & Abdelkrim Seghir, 2019. "Recourse Loans and Ponzi Schemes," School of Economics Discussion Papers 0719, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0719
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    File URL: https://repec.som.surrey.ac.uk/2019/DP07-19.pdf
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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