This paper uses a Lagrangian approach to provide sufficient conditions under which money burning expenditures are used in an optimal delegation contract. For comparison, we also establish simple sufficient conditions for the optimality of a cap allocation under a restricted set of preferences for a benchmark setting in which money burning is not allowed. We also apply our findings to a model of cooperation and to a model with quadratic preferences and families of distribution functions. In addition, we provide several comparative statics results.
Bibliographical noteFunding Information:
Some of the results in this paper were originally circulated in an earlier version of Amador and Bagwell (2013). We thank Marco Battaglini, Alex Frankel, Muriel Niederle and anonymous referees for very helpful comments. Manuel Amador is grateful for financial support from the NSF under grant number 0952816.
© 2020 Elsevier Inc.
- Money burning
- Optimal delegation