Documento de trabajo
With Additional Enforcement Mechanisms, does Collateral Avoid Ponzi Schemes?
Fecha
2008Registro en:
Series Documentos de Trabajo, No. 278 Mayo, 2008
Autor
Revil, Thiago
Torres Martínez, Juan Pablo
Institución
Resumen
In infinite horizon incomplete market economies, when the seizure of
collateral guarantees is the only mechanism enforcing borrowers not to
entirely default on their promises, equilibrium exists independently of
the choice of collateral bundles.
In these economies, we analyze if generic additional enforcement
mechanisms besides the seizure of collateral guarantees may eliminate
the existence of physical feasible individuals’ optimal plans. For this, we
only need to focus on the decision problem of a price taker individual
and on the effectiveness of the additional enforcement mechanisms,
i.e. the amount of payments besides the value of collateral guarantees.
Then, we show that there is a relationship between collateral
requirements and the effectiveness of such additional mechanisms
implying the non-existence of a solution for the individual’s problem.