Optimal Money Burning: Theory and Application to Corporate Dividend Policy
B. Douglas Bernheim, Lee Redding
NBER Working Paper No. 5682
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.
Published: B. Douglas Bernheim & Lee S. Redding, 2001. "Optimal Money Burning: Theory and Application to Corporate Dividends," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(4), pages 463-507, December.