Collateral, default penalties and almost finite-time solvency

We argue that it is possible to adapt the approach of imposing restrictions on available plans through finitely effective debt constraints, introduced by Levine and Zame (1996), to encompass models with default and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002) and Páscoa and Seghir (2008) the concept of almost finite-time solvency. We show that the conditions imposed in these two papers to rule out Ponzi schemes implicitly restrict actions to be almost finite-time solvent. We define the notion of equilibrium with almost finite-time solvency and look on sufficient conditions for its existence. Assuming a mild assumption on default penalties, namely that agents are myopic with respect to default penalties, we prove that existence is guaranteed (and Ponzi schemes are ruled out) when actions are restricted to be almost finite-time solvent. The proof is very simple and intuitive. In particular, the main existence results in Araujo et al. (2002) and Páscoa and Seghir (2008) are simple corollaries of our existence result.

Competitive equilibria in infinite-horizon collateralized economies with default penalties

Araújo, Páscoa and Torres-Martinez (2002) have shown that, without imposing either debt constraints or transversality conditions, Ponzi schemes are ruled out in infinite horizon economies with default when collateral is the only mechanism that partially secures loans. Páscoa and Seghir (2008) subsequently show that Ponzi schemes may reappear if, additionally to the seizure of the collateral, there are sufficiently harsh default penalties assessed (directly in terms of utility) against the defaulters. They also claim that if default penalties are moderate then Ponzi schemes are ruled out and existence of a competitive equilibrium is ensured. The objective of this paper is two fold. First, contrary to what is claimed by Páscoa and Seghir (2008), we show that moderate default penalties do not always prevent agents to run a Ponzi scheme. Second, we provide an alternative condition on default penalties that is sufficient to rule out Ponzi schemes and ensure the existence of a competitive equilibrium.

On Ponzi schemes in infinite horizon collateralized economies with default penalties

Araujo, Páscoa and Torres-Martínez (2002) showed that, without imposing any debt constraint, Ponzi schemes are ruled out in infinite horizon economies with limited commitment when collateral is the only mechanism that partially secures loans. Páscoa and Seghir (2009) presented two examples in which they argued that Ponzi schemes may reappear if, additionally to the seizure of the collateral, there are sufficiently harsh default penalties assessed (directly in terms of utility) against the defaulters. Moreover, they claimed that if default penalties are moderate then Ponzi schemes are ruled out and existence of a competitive equilibrium is restored. This paper questions the validity of the claims made in Páscoa and Seghir (2009). First, we show that it is not true that harsh default penalties lead to Ponzi schemes in the examples they have proposed. A competitive equilibrium with no trade can be supported due to unduly pessimistic expectations on asset deliveries. We subsequently refine the equilibrium concept in the spirit of Dubey, Geanakoplos and Shubik (2005) in order to rule out spurious inactivity on asset markets due to irrational expectations. Our second contribution is to provide a specific example of an economy with moderate default penalties in which Ponzi schemes reappear when overpessimistic beliefs on asset deliveries are ruled out. Our finding shows that, contrary to what is claimed by Páscoa and Seghir (2009), moderate default penalties do not always prevent agents to run a Ponzi scheme.

Endogenous debt constraints in collateralized economies with default penalties

In infinite horizon financial markets economies, competitive equilibria fail to exist if one does not impose restrictions on agents' trades that rule out Ponzi schemes. When there is limited commitment and collateral repossession is the unique default punishment, Araujo, Páscoa and Torres-Martínez (2002) proved that Ponzi schemes are ruled out without imposing any exogenous/endogenous debt constraints on agents' trades. Recently Páscoa and Seghir (2009) have shown that this positive result is not robust to the presence of additional default punishments. They provide several examples showing that, in the absence of debt constraints, harsh default penalties may induce agents to run Ponzi schemes that jeopardize equilibrium existence. The objective of this paper is to close a theoretical gap in the literature by identifying endogenous borrowing constraints that rule out Ponzi schemes and ensure existence of equilibria in a model with limited commitment and (possible) default. We appropriately modify the definition of finitely effective debt constraints, introduced by Levine and Zame (1996) (see also Levine and Zame (2002)), to encompass models with limited commitment, default penalties and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002), Kubler and Schmedders (2003) and Páscoa and Seghir (2009) the concept of actions with finite equivalent payoffs. We show that, independently of the level of default penalties, restricting plans to have finite equivalent payoffs rules out Ponzi schemes and guarantees the existence of an equilibrium that is compatible with the minimal ability to borrow and lend that we expect in our model. An interesting feature of our debt constraints is that they give rise to budget sets that coincide with the standard budget sets of economies having a collateral structure but no penalties (as defined in Araujo, Páscoa and Torres-Martínez (2002)). This illustrates the hidden relation between finitely effective debt constraints and collateral requirements.

Collateral or utility penalties ?

In a two-period economy with incomplete markets and possibility of default we consider the two classical ways to enforce the honor of financial commitments: by using utility penalties and by using collateral requirements that borrowers have to fulfill. Firstly, we prove that any equilibrium in an economy with collateral requirements is also equilibrium in a non-collateralized economy where each agent is penalized (rewarded) in his utility if his delivery rate is lower (greater) than the payment rate of the financial market. Secondly, we prove the converse: any equilibrium in an economy with utility penalties is also equilibrium in a collateralized economy. For this to be true the payoff function and initial endowments of the agents must be modified in a quite natural way. Finally, we prove that the equilibrium in the economy with collateral requirements attains the same welfare as in the new economy with utility penalties.

Tax evasion: causes, estimation methods, and penalties: a focus on Latin America

Includes bibliography

Motherhood wage penalties and labour market segmentation: Evidence from Argentina

Includes bibliography.

A Simple Theory of Increasing Penalties for Repeat Offenders

A feature of many penal codes is that punishments are more severe for repeat offenders, yet economic models have had a hard time providing a theoretical justification for this practice. This paper offers an explanation based on the wage penalty suffered by individuals convicted of crime. While this penalty probably deters some first-timers from committing crimes, it actually hampers deterrence of repeat offenders because of their diminished employments opportunities. We show that in this setting, an escalating penalty scheme is optimal and time consistent.

Aircraft flight trajectory deviation in the standard instrument departures. Operators penalties.

In the recent years many problems are emerging due to the aircraft noise on the airport surrounding areas. The solution to this problem is not easy considering that the neighbourhood asks for the reduction of the number of aircraft operations and the airlines ask for a growing demand in the number of operations in the major airports. So the airport and regulatory authorities try to get a solution imposing a fine to the aircraft which its actual trajectory differs from the nominal one more than a lateral deviation. But, which is the value of this deviation?. The current situation is that many operators have to pay a lot of money for exceeding a deviation which has been established without operational criteria. This paper presents the results of a research program which is being carried out by the authors which aims to determine the "delta" deviation to be used for this purpose. In addition it is proposed a customized method per SID and per airport to be used for determining the maximum allowed lateral deviation by which if the aircraft is within it, then none fine will be imposed.