In the presence of utility penalties, collateral requirements do not always eliminate the occurrence of Ponzi schemes. Harsh utility penalties may induce effective payments over collateral recollection values. In this event, loans can be larger than collateral costs and Ponzi schemes become...

Without introducing either debt constraints or transversality conditions to avoid the possibility of Ponzi schemes, we show the existence of equilibrium in an infinite horizon incomplete markets economy with a collateral structure. Copyright The Econometric Society 2002.