On the strategic value of ‘shooting yourself in the foot’: an experimental study of burning money

Abstract

This paper uses a novel experimental design to investigate the strategic value of making a public payoff sacrifice (“burning money”) in a setting modelled after the battle-of-the-sexes game. Unlike prior studies, we find that subjects choose to burn money in a significant portion of decision trials and that burning makes the first movers more likely to achieve their preferred stage two equilibrium outcome. No such effect is observed in a control treatment where money burning is triggered unintentionally. This suggests that payoff sacrifices are important as deliberate signals of one’s further intentions, and can be a source of strategic advantage different from that stemming from being the first party to move. These results are supported by an analysis of subjects’ eye movements, which reveals patterns consistent with forward induction reasoning.