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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Year of publication:	2012
Authors:	Martins-da-Rocha, V. Filipe ; Vailakis, Yiannis
Published in:	Games and Economic Behavior. - Elsevier, ISSN 0899-8256. - Vol. 75.2012, 1, p. 277-282
Publisher:	Elsevier
Subject:	Infinite horizon economies \| Default penalties \| Collateral \| Ponzi schemes \| Pessimistic expectations \| No-trade

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Type of publication:	Article
Classification:	D52 - Incomplete Markets ; D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10011049684