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Ponzi schemes and the financial sector: DMG and DRFE in Colombia

Author

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  • Hofstetter, Marc
  • Mejía, Daniel
  • Rosas, José Nicolás
  • Urrutia, Miguel

Abstract

We use a novel dataset to estimate, for the first time in the literature, the effects of Ponzi schemes on the formal financial sector. DMG and DRFE, two Ponzi schemes that were shut down by the Colombian government in November 2008, had over half a million customers, who invested funds corresponding to 1.2% of Colombia's annual GDP. We find that pyramid costumers’ obtained more loans from the financial sector and their credit standings were better than those in the respective control groups while the schemes were operating. Afterwards, their loan stocks started to decrease and their ratings with the banking sector deteriorated. Prior to November 2008, deposits in the financial sector fell more in the municipalities more affected by the schemes.

Suggested Citation

  • Hofstetter, Marc & Mejía, Daniel & Rosas, José Nicolás & Urrutia, Miguel, 2018. "Ponzi schemes and the financial sector: DMG and DRFE in Colombia," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 18-33.
  • Handle: RePEc:eee:jbfina:v:96:y:2018:i:c:p:18-33
    DOI: 10.1016/j.jbankfin.2018.08.011
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    References listed on IDEAS

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    1. Hofstetter, Marc & Mejía, Daniel & Rosas, José Nicolás & Urrutia, Miguel, 2018. "Ponzi schemes and the financial sector: DMG and DRFE in Colombia," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 18-33.
    2. Cortés, Darwin & Santamaría, Julieth & Vargas, Juan F., 2016. "Economic shocks and crime: Evidence from the crash of Ponzi schemes," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 263-275.
    3. Chris Jarvis, 2000. "The Rise and Fall of the Pyramid Schemes in Albania," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 1-1.
    4. Bhattacharya, Utpal, 2003. "The optimal design of Ponzi schemes in finite economies," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 2-24, January.
    5. Tennant, David, 2011. "Why do people risk exposure to Ponzi schemes? Econometric evidence from Jamaica," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 328-346, July.
    6. Cox-Edwards, Alejandra & Rodríguez-Oreggia, Eduardo, 2009. "Remittances and Labor Force Participation in Mexico: An Analysis Using Propensity Score Matching," World Development, Elsevier, vol. 37(5), pages 1004-1014, May.
    7. repec:eee:accfor:v:36:y:2012:i:4:p:294-309 is not listed on IDEAS
    8. Artzrouni, Marc, 2009. "The mathematics of Ponzi schemes," Mathematical Social Sciences, Elsevier, vol. 58(2), pages 190-201, September.
    9. Wang-Sheng Lee, 2013. "Propensity score matching and variations on the balancing test," Empirical Economics, Springer, vol. 44(1), pages 47-80, February.
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    1. Hofstetter, Marc & Mejía, Daniel & Rosas, José Nicolás & Urrutia, Miguel, 2018. "Ponzi schemes and the financial sector: DMG and DRFE in Colombia," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 18-33.

    More about this item

    Keywords

    Ponzi schemes; Pyramids; Colombia; Banking; Savings and loans; Loan ratings;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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