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A Model of Charles Ponzi

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Abstract

We develop a model of Ponzi schemes with asymmetric information to study Ponzi frauds. A long-lived agent offers to save on behalf of short-lived agents at a higher rate than they can earn themselves. The long-lived agent may genuinely have a superior savings technology, but may be an imposter trying to steal from short-lived agents. The model identifies when a Ponzi fraud can occur and what interventions can prevent it. A key feature of Ponzi frauds is that the long-lived agent builds trust over time and improves their reputation by keeping the scheme going.

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  • Gadi Barlevy & Inês Xavier, 2025. "A Model of Charles Ponzi," Finance and Economics Discussion Series 2025-020, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-20
    DOI: 10.17016/FEDS.2025.020
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    References listed on IDEAS

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    1. Chris Jarvis, 2000. "The Rise and Fall of the Pyramid Schemes in Albania," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 1-1.
    2. Antonio Doblas‐Madrid, 2012. "A Robust Model of Bubbles With Multidimensional Uncertainty," Econometrica, Econometric Society, vol. 80(5), pages 1845-1893, September.
    3. John R. Conlon, 2004. "Simple Finite Horizon Bubbles Robust to Higher Order Knowledge," Econometrica, Econometric Society, vol. 72(3), pages 927-936, May.
    4. Frankel, Tamar, 2012. "The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims," OUP Catalogue, Oxford University Press, number 9780199926619.
    5. Ville Rantala, 2019. "How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme," Journal of Finance, American Finance Association, vol. 74(5), pages 2349-2389, October.
    6. Antler, Yair, 2023. "Multilevel marketing: pyramid-shaped schemes or exploitative scams?," Theoretical Economics, Econometric Society, vol. 18(2), May.
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    Keywords

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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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