Optimal signaling with cheap talk and money burning

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.