Rash, Delay and the Money Burning Refinement in Signaling Games
24 Pages Posted: 5 Mar 1999
Date Written: February 1999
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: Suggested Citation