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With additional enforcement mechanisms,does Collateral avoid Ponzi Schemes ?

Author

Listed:
  • Thiago Revil

    (Department of Economics, PUC-Rio)

  • Juan Pablo Torres-Martinez

    () (Department of Economics, PUC-Rio)

Abstract

In infinite horizon incomplete market economies, Ponzi schemes are avoided and equilibrium exists when collateral repossession is the only mechanism enforcing borrowers not to entirely default on their promises. In these economies, we add default enforcement mechanisms that are effective, i.e. induce payments besides the value of collateral guarantees. We prove that, independently of prices, the individual’s problem does not have a physically feasible solution when collateral guarantees are not large enough relative to the effectiveness of the additional enforcement mechanisms. We also show that this result does not depend on specific types of such mechanisms, as long as they are effective.

Suggested Citation

  • Thiago Revil & Juan Pablo Torres-Martinez, 2007. "With additional enforcement mechanisms,does Collateral avoid Ponzi Schemes ?," Textos para discussão 545, Department of Economics PUC-Rio (Brazil), revised Apr 2008.
  • Handle: RePEc:rio:texdis:545
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    File URL: http://www.econ.puc-rio.br/pdf/td545_revisto_abril08.pdf
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    References listed on IDEAS

    as
    1. Steinert, Mariano & Torres-Martinez, Juan Pablo, 2007. "General equilibrium in CLO markets," Journal of Mathematical Economics, Elsevier, vol. 43(6), pages 709-734, August.
    2. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Effective default enforcements; Collateral repossession; Individual’s optimality.;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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