Costly Verification and Money Burning

We consider the problem of a principal aiming to allocate an indivisible, productivity-enhancing resource—-e.g., computing equipment, a grant, etc.—-to one of many agents. The principal can utilize two instruments previously studied only in isolation but often used together in practice: costly verification and money burning. We identify the optimal allocation protocol, which takes one of two forms. When full separation of types is suboptimal, money burning is not employed, but there is significant pooling. If full separation is optimal, then both instruments are used. Lower types are only subject to money burning. Higher types go through verification and burn money. Notably, money burning is not substituted away.