Finance and Economics Discussion Series (FEDS)
March 2025
A Model of Charles Ponzi
Gadi Barlevy, Ines Xavier
Abstract:
We develop a model of Ponzi schemes with asymmetric information to study Ponzi frauds. A long-lived agent offers to save on behalf of short-lived agents at a higher rate than they can earn themselves. The long-lived agent may genuinely have a superior savings technology, but may be an imposter trying to steal from short-lived agents. The model identifies when a Ponzi fraud can occur and what interventions can prevent it. A key feature of Ponzi frauds is that the long-lived agent builds trust over time and improves their reputation by keeping the scheme going.
Keywords: Ponzi scheme, asymmetric information, reputation, fraud
DOI: https://doi.org/10.17016/FEDS.2025.020
PDF: Full Paper
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