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 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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- 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.
- Martins-da-Rocha, Victor Filipe & Vailakis, Y., 2011. "On Ponzi schemes in infinite horizon collateralized economies with default penalties," Economics Working Papers (Ensaios Economicos da EPGE) 718, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Martins-da-Rocha, Victor-Filipe & Vailakis, Yiannis, 2012. "On Ponzi schemes in infinite horizon collateralized economies with default penalties," Economics Papers from University Paris Dauphine 123456789/10573, Paris Dauphine University.
- 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.
- Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
- P. Dubey & J. Geanakoplos & M . Shubik, 2001. "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, Stony Brook University, Department of Economics.
- 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.
- Aloisio Araujo & M�rio Rui P�scoa & Juan Pablo Torres-Mart�nez, 2002.
"Collateral Avoids Ponzi Schemes in Incomplete Markets,"
Econometric Society, vol. 70(4), pages 1613-1638, July.
- 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).
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