Rash, Delay and the Money Burning Refinement in Signaling Games

24 Pages Posted: 5 Mar 1999

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: February 1999

Abstract

We consider an equilibrium refinement in signaling games by allowing agents to perform costly tests of beliefs by burning money. We apply the refinement in a model where the public is unsure about the ability of an agent, such as a government, to foresee the effects of long-term decisions. Agents with much information about the consequences of decisions should invest either immediately or never. Poorly informed agents should wait for better information. We identify pooling equilibria in which excessive rush or waiting occurs. The burning money refinement eliminates rash and waiting distortions, but it implies wasting money and, for high discount factors, a decrease in welfare. We also identify the conditions under which the public should allow the agent to burn the public's money.

JEL Classification: C79

Suggested Citation

Gersbach, Hans, Rash, Delay and the Money Burning Refinement in Signaling Games (February 1999). Available at SSRN: https://ssrn.com/abstract=146192 or http://dx.doi.org/10.2139/ssrn.146192

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
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+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
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Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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