With additional enforcement mechanisms, does Collateral avoid Ponzi Schemes ?

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Texto para discussão ; No. 545

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Disequilibrium: General ; Incomplete Markets
• Subject: Effective default enforcements ; Collateral repossession ; Individual’s optimality.

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Revil, Thiago ; Torres-Martínez, Juan Pablo
• Event: Veröffentlichung
• (who): Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), Departamento de Economia
• (where): Rio de Janeiro
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/176028
• Last update: 10.03.2025, 11:42 AM CET