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.
Item Type: | Paper |
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Keywords: | Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium |
Faculties: | Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A8 - Strategische Erzeugung und Weitergabe von Informationen Economics Economics > Chairs > Chair of Dynamic Economic Theory (closed) |
Subjects: | 300 Social sciences > 330 Economics |
JEL Classification: | C73, D83, O32 |
URN: | urn:nbn:de:bvb:19-epub-13309-9 |
Language: | English |
Item ID: | 13309 |
Date Deposited: | 10. Jul 2012, 13:08 |
Last Modified: | 04. Nov 2020, 12:53 |