TY  - JOUR
AU  - Bernheim,B. Douglas
AU  - Redding,Lee
TI  - Optimal Money Burning: Theory and Application to Corporate Dividend Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5682
PY  - 1996
Y2  - July 1996
UR  - http://www.nber.org/papers/w5682
L1  - http://www.nber.org/papers/w5682.pdf
N1  - Author contact info:
B. Douglas Bernheim
Department of Economics
Stanford University
Stanford, CA 94305-6072
Tel: 650/725-8732
Fax: 650/725-5702
E-Mail: bernheim@stanford.edu
AB  - 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.
ER  -