The money-burning refinement: With an applicationto a political signalling game.
Abstract. 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.
Key words: Rush and delay, money-burning refinement, belief-change,
signalling in politics.