Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296422 
Authors: 
Year of Publication: 
2023
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 18 [Issue:] 2 [Year:] 2023 [Pages:] 633-668
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
Motivated by the growing discussion on the resemblance of multilevel marketing schemes to pyramid scams, we compare the two phenomena based on their underlying compensation structures. We show that a company can design a pyramid scam to exploit a network of agents with coarse beliefs and that this requires the company to charge the participants a license fee and pay them a recruitment commission for each of the people that they recruit and that their recruits recruit. We characterize the schemes that maximize a company's profit when it faces fully rational agents, and establish that the company never finds it profitable to charge them a license fee or pay them recruitment commissions.
Subjects: 
analogy-based expectations
misspecified models
Multilevel marketing
pyramid schemes
speculative trade
JEL: 
D84
D86
L29
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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