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Optimal signaling with cheap talk and money burning

Vladimir Karamychev () and Bauke Visser ()

International Journal of Game Theory, 2017, vol. 46, issue 3, 813-850

Abstract: Abstract We study Sender-optimal signaling equilibria with cheap talk and money-burning. Under general assumptions, the Sender never uses money-burning to reveal all states, but always wants to garble information for at least some states. With quadratic preferences and any log-concave density of the states, optimal communication is garbled for all states: money-burning, if used at all, is used to adjust pooling intervals. This is illustrated by studying in depth the well-known uniform-quadratic case. We also show how the presence of a cost of being “caught unprepared” that gives rise to a small change in a common assumption on the Receiver’s utility function makes full revelation through money-burning Sender-optimal.

Keywords: Cheap talk; Money burning; Persuasion; Optimal equilibrium (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:spr:jogath:v:46:y:2017:i:3:d:10.1007_s00182-016-0558-2