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Rational Ponzi Games


  • Stephen A. O'Connell
  • Stephen P. Zeldes


When can a government borrow a dollar and never pay back any interest or principal? We call such an arrangement under perfect foresight a rational Ponzi game. We use the transversality condition facing individual agents to show that rational Ponzi games require an infinity of lenders. The horizon of individual agents is unimportant; Ponzi games cannot be ruled out by assuming that agents have infinite horizons. We point out both the basic similarity and some key differences between rational Ponzi games and asset price bubbles or fiat money. With reference to the international debt issue, the analysis implies that conditions in the borrower’s economy are irrelevant to the feasibility of rational Ponzi games; what matters is the relationship between the paths of interest rates and population and productivity growth rates in the lenders’ economy.

Suggested Citation

  • Stephen A. O'Connell & Stephen P. Zeldes, "undated". "Rational Ponzi Games," Rodney L. White Center for Financial Research Working Papers 18-86, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:18-86

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    Other versions of this item:

    • O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-450, August.

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