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, Victor-Filipe ; Vailakis, Yiannis
Institutions:	Université Paris-Dauphine (Paris IX)
Subject:	Inﬁnite horizon economies \| Default penalties \| Collateral \| Ponzi schemes \| Pessimistic expectations \| No-trade

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Series:	Economics Papers from University Paris Dauphine.
Type of publication:	Book / Working Paper
Notes:	Published in Games and Economic Behavior, 2012, Vol. 75, no. 1. pp. 277-282.Length: 5 pages
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/10011072648