A Ponzi scheme is a fraudulent investment operation in which returns to investors are paid from funds collected from new investors rather than from profit earned by the operator. The scheme takes its...

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Ponzi scheme
is a fraudulent investment operation in which returns to investors are paid from funds collected from new investors rather than from profit earned by the operator. The scheme takes its name from the notorious operation of Charles Ponzi in 1920. The case of Bernie Madoff is a more recent example.† Suppose the operator of a Ponzi scheme pays an initial return to investors of $17,000. Each month, he must recruit enough new investors to increase the return by 3%.