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Collateral, default penalties and infinite horizon equilibrium
Orientador(es)
Resumo(s)
Pascoa and Seghir (2009) noticed that when collateralized promises become subject to
utility penalties on default, Ponzi schemes may occur. However, equilibrium exists in some interesting
cases. Under low penalties, equilibrium exists if the collateral does not yield utility (for example, when
it is a productive asset or a security). Equilibrium exists also under more severe penalties and collateral
utility gains, when the promise or the collateral are nominal assets and the margin requirements are
endogenous: relative inflation rates and margin coefficients can make the income effects dominate the
penalty effects. An equilibrium refinement avoids no-trade equilibria with unduly repayment beliefs.
Our refinement differs from the one used by Dubey, Geanakoplos and Shubik (2005) as it does not
eliminate no trade equilibria whose low delivery rates are consistent with the propensity to default of
agents that are on the verge of selling.
Descrição
Palavras-chave
Incomplete markets Default Collateral Utility penalties Ponzi schemes