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On The (Relative) Merits of Money Burning For Optimal Contracting

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  • Javier Gonzalez Morin

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • David Martimort

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

We consider the following screening model of procurement. An agent (the seller) has private information on his cost parameter. A principal (the buyer) learns an ex post signal on this parameter. The signal is private information to the principal and proper incentives to reveal this signal must be designed. In related contexts, money burning, i.e., the ex post destruction of some of the gains from trade, has shown to be useful to provide such incentives. We demonstrate that money burning allows the principal to implement the first-best output with zero information rent for the agent; although it is never optimal to do so since output distortions are less costly. More generally, money burning is rarely optimal, and only used as a tool of last resort if output distortions are no longer feasible. In particular, when output must be chosen before the non-verifiable signal realizes, money burning becomes more attractive.

Suggested Citation

  • Javier Gonzalez Morin & David Martimort, 2026. "On The (Relative) Merits of Money Burning For Optimal Contracting," Working Papers hal-05601560, HAL.
    • Handle: RePEc:hal:wpaper:hal-05601560
    Note: View the original document on HAL open archive server: https://hal.science/hal-05601560v1
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