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.

, , ,
doi.org/10.1007/s00182-016-0558-2, hdl.handle.net/1765/94302
International Journal of Game Theory
Erasmus University Rotterdam

Karamychev, V., & Visser, B. (2017). Optimal signaling with cheap talk and money burning. International Journal of Game Theory, 1–38. doi:10.1007/s00182-016-0558-2