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Optimal Money Burning

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  • B. Douglas Bernheim
  • Lee Redding

Abstract

December 1995 We explore signaling behavior in settings with a discriminating signal and several costly nondiscriminating ("money burning") activities. In settings where informed parties have many options for burning money, existing theory provides no basis for selecting one nondiscriminating activity over another. When senders have private information about the costs of these activities, each sender's indifference is resolved, the taxation of a nondiscriminating signal is Pareto improving, and the use of the taxed activity becomes more widespread as the tax rate rises. We apply this analysis to the theory of dividend signaling. The central testable implication of the model is verified empirically.

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Bibliographic Info

Paper provided by Stanford University, Department of Economics in its series Working Papers with number 96010.

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Date of creation: Dec 1995
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Handle: RePEc:wop:stanec:96010

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  1. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
  2. Hakansson, Nils H, 1982. " To Pay or Not to Pay Dividend," Journal of Finance, American Finance Association, vol. 37(2), pages 415-28, May.
  3. Williams, Joseph, 1988. " Efficient Signalling with Dividends, Investment, and Stock Repurchase s," Journal of Finance, American Finance Association, vol. 43(3), pages 737-47, July.
  4. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
  5. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  7. B. Douglas Berhheim, 1991. "Tax Policy and the Dividend Puzzle," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 455-476, Winter.
  8. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
  9. Nils H. Hakansson., 1982. "To Pay or Not to Pay Dividends," Research Program in Finance Working Papers 124, University of California at Berkeley.
  10. Feldstein, Martin S, 1970. "Corporate Taxation and Dividend Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 37(1), pages 57-72, January.
  11. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
  12. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June.
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