Optimal Money Burning: Theory and Application to Corporate Dividend Policy

B. Douglas Bernheim () and Lee Redding

No 5682, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H32 G35 (search for similar items in EconPapers)
Date: 1996-07
Note: PE
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