Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/150139
Authors: 
Rady, Sven
Keller, Godfrey
Year of Publication: 
2010
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 5 [Year:] 2010 [Issue:] 2 [Pages:] 275-311
Abstract: 
We study a game of strategic experimentation with two-armed bandits where the risky arm distributes lump-sum payoffs according to a Poisson process. Its intensity is either high or low, and unknown to the players. We consider Markov perfect equilibria with beliefs as the state variable and show that all such equilibria exhibit an 'encouragement effect' relative to the single-agent optimum. There is no equilibrium in which all players use cut-off strategies. Owing to the encouragement effect, asymmetric equilibria in which players take turns playing the risky arm before all experimentation stops Pareto dominate the unique symmetric equilibrium. Rewarding the last experimenter with a higher continuation value increases the range of beliefs where players experiment, but may reduce the intensity of experimentation at more optimistic beliefs. This suggests that there is no equilibrium that uniformly maximizes the players' average payoff.
Subjects: 
Strategic experimentation
two-armed bandit
Poisson process
Bayesian learning
piecewise deterministic process
Markov perfect equilibrium
differential-difference equation
JEL: 
C73
D83
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc/3.0/
Document Type: 
Article

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