Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/93959 
Year of Publication: 
2008
Series/Report no.: 
SFB/TR 15 Discussion Paper No. 243
Publisher: 
Sonderforschungsbereich/Transregio 15 - Governance and the Efficiency of Economic Systems (GESY), München
Abstract: 
We analyze a two-player game of strategic experimentation with two-armed bandits. Each player has to decide in continuous time whether to use a safe arm with a known payoff or a risky arm whose likelihood of delivering payoffs is initially unknown. The quality of the risky arms is perfectly negatively correlated between players. In marked contrast to the case where both risky arms are of the same type, we find that learn- ing will be complete in any Markov perfect equilibrium if the stakes exceed a certain threshold, and that all equilibria are in cutoff strategies. For low stakes, the equilib- rium is unique, symmetric, and coincides with the planner's solution. For high stakes, the equilibrium is unique, symmetric, and tantamount to myopic behavior. For inter- mediate stakes, there is a continuum of equilibria.
Subjects: 
Strategic Experimentation
Two-Armed Bandit
Exponential Distribution
Poisson Process
Bayesian Learning
Markov Perfect Equilibrium
JEL: 
C73
D83
O32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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