Abstract

http://ssrn.com/abstract=322521
 
 

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The Optimal Design of Ponzi Schemes in Finite Economies


Utpal Bhattacharya


Indiana University - Kelley School of Business - Department of Finance


Journal of Financial Intermediation, January 2003

Abstract:     
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)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3413 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/ubhattac/

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