The Optimal Design of Ponzi Schemes in Finite Economies

Utpal Bhattacharya

HKUST Business School

Journal of Financial Intermediation, January 2003

As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this "too big to fail" doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed - France (1719), Britain (1720), Russia (1994) and Albania (1997).

Keywords: Ponzi schemes, bubbles, bailouts, moral hazard

JEL Classification: G15, G28, E60

Accepted Paper Series

Not Available For Download

Date posted: October 1, 2002  

Suggested Citation

Bhattacharya , Utpal, The Optimal Design of Ponzi Schemes in Finite Economies. Journal of Financial Intermediation, January 2003. Available at SSRN: http://ssrn.com/abstract=322521

Contact Information

Utpal Bhattacharya (Contact Author)
HKUST Business School ( email )
Clear Water Bay
Hong Kong
Feedback to SSRN

Paper statistics
Abstract Views: 2,056

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.281 seconds