Harsh default penalties lead to Ponzi schemes: a counterexample
Martins-da-Rocha, V. Filipe
Games and Economic Behaviour
Pascoa 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. We provide a counterexample to their claim by showing that no trade is a competitive equilibrium in the examples they consider.
Preprint dated October 12, 2011. Final version published by Elsevier; available online at http://www.sciencedirect.com/
Volume 75, Issue 1, May 2012, Pages 277–282