The money-burning refinement: With an application to a political signalling game
We define an equilibrium refinement in signalling games by allowing agents to refine the game by burning money whenever they can act. We apply the refinement in a model where the public is unsure about the ability of an agent, say a government, to foresee the effects of long-term decisions. A government with ample information about the consequences of decisions should invest either immediately or not at all. Poorly informed agents should wait for better information. We identify pooling equilibria in which excessive rush or waiting occurs. The money-burning refinement may eliminate both rash and waiting pooling equilibria, but it involves wasting money and, for high discount factors, a decrease in welfare. Copyright Springer-Verlag 2004
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Volume (Year): 33 (2004)
Issue (Month): 1 (January)
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