Money Burning Research Articles

MIXED EQUILIBRIUM IN 2 × 2 NORMAL FORM GAMES: WHEN BURNING MONEY IS RATIONAL

We discuss the rationality of burning money behavior from a new perspective: the mixed Nash equilibrium in 2 × 2 normal form games. We support our argument analyzing the first-order derivatives of the players' mixed equilibrium expected utility payoffs with respect to their own utility payoffs. We establish necessary and sufficient conditions that guarantee the existence of negative derivatives. In particular, games with negative derivatives are the ones that create incentives for burning money behavior since such behavior in these games improves the player's mixed equilibrium expected utility payoff. We show that a negative derivative of some player i 's mixed equilibrium expected utility payoff occurs if, and only if, he has a strict preference for one of the strategies of the other player. Moreover, negative derivatives always occur when they are taken with respect to player i 's highest and lowest game utility payoffs. We also present sufficient conditions that ensure that such derivatives are always non-negative in finite normal form games.

Subjective evaluation versus public information

This paper studies a principal–agent relation in which the principal’s private information about the agent’s effort choice is more accurate than a noisy public performance measure. For some contingencies the optimal contract has to specify ex post inefficiencies in the form of inefficient termination (firing the agent) or wasteful activities that are formally equivalent to third-party payments (money burning). Under the optimal contract, the use of these instruments depends not only on the precision of public information but also on job characteristics. Money burning is used at most in addition to firing and only if the loss from termination is small. The agent’s wage may depend only on the principal’s report and not on the public signal. Nonetheless, public information is valuable as it facilitates truthful subjective evaluation by the principal.

Investment Choices with Envy and Altruism

The effect of envy and altruism on investment choices is analyzed by employing utility-free bivariate First-degree Stochastic Dominance (FSD) rule. Using the classic expected utility as the benchmark we find that envy or altruism may induce univariate FSD violation, hence a violation of the classic expected utility monotonicity axiom. Thus, the negative result is that an FSD inferior prospect may be selected inducing expected utility loss. Surprisingly, not only envy but also altruism may induce “contingent money burning” causing a reduction in the classic univariate expected utility of both the investor and her peer group. The positive result is that the bivariate SD efficient set always contains the univaraite SD efficient set. Hence, for some investors a careful selection from the bivariate efficient set may avoid the economic loss.

“Want to” Versus “Have to”: Intrinsic and Extrinsic Motivators as Predictors of Compliance Behavior Intention

“Worthless,” “money burning,” or “black holes” is how media and professionals describe compliance practices today. Practitioners are unenthusiastic about control systems, codes of conducts, and systems for compliance management that are increasing in volume but not in effectiveness. In order to help practitioners clarify what actually makes employees comply with their compliance program, this study examines intrinsic and extrinsic motivators of 119 employees from procurement and sales. We contribute to the existing motivation literature, testing the self-determination theory in low and high hierarchical levels. Our findings show that intrinsic motivators are more strongly and positively related to compliance intention on higher hierarchical levels than the lower ones. However, employees from higher hierarchies show overall less compliance intention than employees from lower hierarchies. © 2015 The Authors. Human Resource Management published by Wiley Periodicals, Inc.

Delegation and Nonmonetary Incentives

In many contracting settings, actions costly to one party but with no direct benefits to the other (money-burning) may be part of the explicit or implicit contract. A leading example is bureaucratic procedures in an employer-employee relationship. We study a model of delegation with an informed agent, where the principal may impose money-burning on the agent as a function of the agent’s choice of action, and show that money-burning may be part of the optimal contract. This result holds even if action-contingent monetary transfers are possible, as long as transfers from the principal to the agent are bounded from below (as in limited liability or minimal wage requirements). In fact, the optimal contract can involve a combination of both efficient monetary incentives and inefficient nonmonetary incentives through money burning. Our model delivers some results novel to the delegation literature. First, money-burning is more likely if the principal is more sensitive to the choice of action than the agent. This is consistent with the perception that there is more bureaucratization in large organizations. Second, money-burning is more likely if the agent’s limited liability constraint is tighter relative to his participation constraint. This implies that a higher minimum wage distorts employment contracts towards using socially wasteful nonmonetary incentives, leading to a Pareto inferior outcome as the agent is still held down to his reservation value through increased money burning.The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2700851

MONEY TALKS? AN EXPERIMENTAL INVESTIGATION OF CHEAP TALK AND BURNED MONEY

We experimentally study the strategic transmission of information in a setting where both cheap talk and money can be used. Theoretically, many equilibria exist side by side, in which senders use either costless messages, money, or both. We find that senders prefer to communicate through costless messages. Only when the interest disalignment between sender and receiver increases does cheap talk tend to break down and high sender types start burning money to enhance the credibility of their costless messages. A behavioral model assuming that sellers bear a cost of lying fits the data best.

Powers of the Dead: Struggles over Paper Money Burning in Urban China

This paper explores how the Chinese customary ritual of burning paper money to commemorate the dead ancestors challenges the nature-culture dichotomy. The paper argues that the practice of burning paper money reflects a Chinese cosmology that is not based on a dichotomy between the living and the dead, instead, the dead is often mobilized to exert influential power over the living. The paper money that people use in such rituals are active actors that participates in people’s social, cultural and economic life. The paper also investigates how the conflict between government policy and traditional practice demonstrates that the modernists’ efforts to mobilize modern dichotomies have failed to triumph over the entanglement among networks of the living and the dead, the human and the spirit, the object and the subject, nature, culture, and super-nature.

Livelihood resilience in a hyperinflationary environment: experiences of people engaging in money-burning (kubhena mari) transactions in Harare, Zimbabwe

At the zenith of Zimbabwe’s protracted politico-economic crises around 2007, which resulted in record hyperinflation, the majority of ordinary people confronted monumental livelihood challenges and complex reconfigurations of social and economic relationships. Many people could hardly sustain themselves from their meagre salaries from formal employment. In spite of this seemingly insurmountable livelihood catastrophe, people did not remain passive victims of such economic quandary. Rather, in the midst of this economic crisis, many people demonstrated great ingenuity, resilience and displayed immense resourcefulness in terms of rationally navigating through the economic crisis. This study explores a widespread survival strategy adopted by many people in Harare as a response to economic conditions: that of “money burning” or illegally exchanging money on the black market through electronic transfers. It is argued in this study that the emergence of money “burning” was a clear manifestation of human agency directed at individual survival amid livelihood catastrophe. Research findings revealed that money burning had become the lifeblood of many urbanites’ survival and livelihood portfolio. Interestingly, people’s perceptions on the money-burning practice were rather ambivalent. In trying to dissect the money-burning practice, I adopted Giddens’s structuration thesis and more especially the “structure–agency” dichotomy as my analytical insight, showing how the structure constrains and enables simultaneously.

Fiscal Rules and Discretion in a World Economy

Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare centralized rules -- chosen jointly by all countries -- to decentralized rules. If governments' present bias is small, centralized rules are tighter than decentralized rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, centralized rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits and money burning enhance welfare, and inefficiencies arise if some countries adopt stricter rules than imposed centrally.

Social Preferences and Agricultural Innovation: An Experimental Case Study from Ethiopia

We run an experiment in Ethiopia where farmers can use their own money to decrease the money of others (money burning). The data support the prediction from an inequality aversion model based on absolute income differences; but there is no support for an inequality aversion model based on comparison with mean payoff of others. Experimentally measured money burning on the village level is negatively correlated to real-life agricultural innovations. This result is robust even when data from another independent survey than the current research are used. This underscores the importance of social preferences in agricultural innovations in developing countries.

The Financial Crisis in Harrisburg, Pennsylvania

This article provides a comprehensive analysis of the Harrisburg, PA fiscal crisis and subsequent bankruptcy filing. While the “money burning” incinerator in Harrisburg was a major contributing factor to its overall financial crisis, there were other contributing factors. These include a mixture of political expediency, financial chicanery and malfeasance by public officials, demographic changes, economic decline of the city and the national economic environment during the Great Recession. The paper concludes by focusing on the lessons to be learned from the mistakes made by city officials and offers policy recommendations for other state and local governments to avoid future fiscal crises of this magnitude.

Jostling for Clientele in the Wake of a Dollarized Economy in Zimbabwe: A Case Study of the Banking Sector in Masvingo Urban

This paper explores the various strategies that banks in Masvingo are using to lure new clients. It is argued in this paper that the hyper – inflationary environment prior to dollarization of the economy had led to a booming business for most banks engaging in illicit activities like money burning. However, adoption of the dollarization of the economy culminated into a partial decomposition and at worst death of some banks as they struggled to adjust to a new economic dispensation. Findings in this study highlight that banks are embroiled in a subtle scramble for clientele as they try to capitalize on the resuscitated client confidence in the banking sector. It emerged that banks have resorted to provision of lucrative loan deal, use of modern ICTs and engaging in various corporate social responsibility activities to improve their corporate image so as to lure new clients. This study was purely qualitative in nature and adopted a triangulation of data soliciting techniques that included unstructured interviews, Focus group discussions, secondary sources and key informant interviews.

Fiduciary Accountability for Managing Funding Ratios in Florida's Local Government Pension Plans or 'You've Got to be Very Careful if You Don't Know Where You're Going, Because You Might Not Get There' - Yogi Berra

Fundamental fiduciary investment practice standards require the development of an investment policy in order to further a plan’s funding policy objectives. Until now, local government pension plans used almost the opposite approach. Under this old paradigm, local government plans used “long-term” investment policies regardless of the plan’s financial and cash flow needs; and then used the “expected return” from that policy as the dominant element of a faux funding policy; namely, the actuarial valuation. On October 1, 2000, the City of Fort Myers had fully funded the accrued liabilities of its general employee pension plan. By October of 2010, plan assets were insufficient to cover any liabilities for either the accrued benefits of its covered active employees, or for the contributions that employees themselves had made to the plan. Moreover, only 83.2% of obligations for existing retirees were covered by assets, even at the high 7.75% discount rate used to value liabilities.This decline to 0% coverage also occurred in the large general employee pension plans of nine other Florida cities. The thesis here is that, at least in Florida, where a local government is required to make its ARC (actuarially required contribution) that this kind of decline is a result of funding policy discipline failures. The paper reviews the performance of a range of standard asset allocation portfolios to confirm that the market over this period was generally consistent with 7% expected returns, if not the above average actuarial expected return assumptions returns used by each of these 10 general employee pension plans. A changing public pension paradigm, best illustrated by the Robert Novy-Marx burning money hypothetical, is at the core of this discipline failure. This hypothetical showed how a public pension plan could improve its apparent funded status by actually burning bonds in order to get rid of stable, but relatively low expected return investments. The objective of the burning was so that the remaining assets would be invested – for the long-term – in high volatility / high expected return equity assets. Under the old “long-term” only paradigm, the actuary would then discount liabilities by this higher equity expected return rate rather than a blended portfolio rate, showing an actuarially better funded plan.GASB (Government Accounting Standards Board) principles for liability accounting and disclosure have changed such that a “long-term” liability discount rate can, for future disclosures, only be used to the extent that an investment policy with that expected return will be used on real assets. This paper helps to show how many of the conclusions of recent LeRoy Collins Institute research on Florida’s underfunded municipal pension plans relate to a plan’s funding ratio objective. One of the most significant of these conclusions is that the cash flow out of many local government plans are now very significant; and can be much larger than the monies being contributed for the plan’s unfunded accrued liability.The GASB change is very significant, not just because of its new standards, but also because these standards reinforce fundamental fiduciary practice standards. These practice standards require that investment policies further a plan’s funding policy objectives rather than the other way around. The GASB change will also help to remove the moral hazard in public sector pension governance that had restricted both investment consultants and actuaries from helping plans achieve a plan’s funding ratio objectives.Local government pension trustees should be setting and managing to plan funding ratio objectives; and they now should have additional valuable resources for helping them in this role; namely, the actuary and the investment consultant.

When white space is more than “burning money”: Economic signaling meets visual commercial rhetoric

Previous work has demonstrated that the use of white space in advertising communicates specific meanings to consumers and that this meaning derives from particular historical moments in the art and visual rhetoric of 20th-century North America. The use of “empty space” in ads, however, can also be conceptualized as a signal of burning money, which could influence consumer perceptions about the size and power of a company through completely different mechanisms. Somewhat surprisingly, nearly all empirical demonstrations of burning money in a consumer advertising context also manipulated white space, leaving the mechanism of action unclear. The results of the three studies discussed here indicate that white space is different from other ways of burning money, and its meanings are sufficiently different across cultures, thus providing stronger support for the rhetorical explanation than the economic signaling one. The findings are discussed in terms of their implications for previous research that found that consumers infer quality from the economic signals of burning money.

Mixed Equilibrium, Collaborative Dominance and Burning Money: An Experimental Study

We experimentally study three aspects of \(2\times 2\) one-shot games with collaboratively dominant strategies: if subjects play according to the mixed Nash equilibrium; if the collaborative equilibrium has a focal point property; and if the burning money mechanism stimulates a collaborative behavior. First, our results show that players do not seem to play according to the mixed Nash equilibrium and that the collaborative equilibrium does not seem to have focal point properties. In fact, the subjects seem to prefer less risky strategies when compared to efficient ones. Our results also show that a burning money mechanism only helps players to collaborate when it transforms a collaborative profile of strategies into a collaborative equilibrium. This fact is justified because other burning money mechanisms will only help collaboration if the subjects were playing according to de mixed Nash equilibrium. Furthermore, even when burning money mechanisms improved the collaboration rate, such rate’s increase was smaller than the expected by the mixed Nash equilibrium.

The Theory of Optimal Delegation With an Application to Tariff Caps

We consider a general representation of the delegation problem, with and without money burning, and provide sufficient and necessary conditions under which an interval allocation is optimal. We also apply our results to the theory of trade agreements among privately informed governments. For both perfect and monopolistic competition settings, we provide conditions under which tariff caps are optimal. [PUBLICATION ABSTRACT]

Tariff Revenue and Tariff Caps

We characterize the design of an optimal trade agreement when governments are privately informed about the value of tariff revenue. We show that the problem of designing an optimal trade agreement in this setting can be represented as an optimal delegation problem when a money burning instrument is available. In a specification with quadratic payoffs and a uniform distribution, we find that the tariff cap and the probability of binding overhang are higher when the upper bound of the support distribution is higher and when the support distribution has greater width.

How burning money requires a lot of rationality to be effective

This paper proposes an extension of the valuation equilibrium concept (Jehiel and Samet, 2007), which partly endogenises the underlying grouping of actions. The effect on equilibrium predictions is illustrated in a burning money game.

Performance and Turnover in a Stochastic Partnership

Suppose that players in a stochastic partnership have the option to quit and rematch anonymously. If stage-game payoffs are subject to a persistent initial shock, the (unique) social welfare-maximizing equilibrium induces a “dating” process in which all partners enjoy the full potential equilibrium gains from each match. By contrast, maximizing social welfare in non-stochastic repeated games with rematching requires that players burn money or otherwise fail to realize all potential equilibrium gains. Comparative statics on welfare and turnover are also provided, consistent with documented patterns of “survivorship bias” and “honeymoon.” (JEL C72, C73, C78)

An Optimal Signaling Equilibrium

This paper analyses the optimal combination of costly and costless messages that a Sender uses in a signaling game if he is able to choose among all equilibrium communication strategies. We provide a complete characterization of the equilibrium that maximizes the Sender's ex ante expected utility in case of uniformly distributed types and quadratic loss functions. First, the Sender often wants to avoid money burning by using the most informative cheap talk communication strategy. Second, if he does burn money, he avoids separation and only re-arranges the existing intervals of the most informative cheap talk equilibrium, possibly adding one extra interval. Money burning takes place in the second interval only.